Canadian home prices have been on a roll. Problem is, many Canadians can’t afford them.
This Financial Post story shows how lenders are now making payments within reach, and the cost of it all.
Points of interest:
Average Canadian home price: $311,101
25-year mortgage payment on this amount: $1827
40-year mortgage payment on this amount: $1510
Percentage of Canadians amortizing over 25 years: 35%
(figures based on a $0-down 5.1% five-year mortgage)
30-50 year mortgages are exploding in popularity because they let people afford houses they otherwise couldn’t. The flipside? Interest costs.
Interest on the 25-year mortgage above: $237,253
Interest on the 40-year mortgage above: $414,033
Many Canadians seem happily oblivious though. More and more, homebuyers are living in the moment without concern for their long-term net worth. Dare I say, it seems eerily similar to the mentality in places like California, at the start of the U.S. subprime era.
The story makes a strong point about pre-paying your mortgage: “If your mortgage is at 6% and you’re paying with after tax-income based on a 50% marginal rate, you’re getting a 12% guaranteed investment. ‘Where are you going to get a 12% return on your investment?'”
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