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Long Amortizations Become Popular

1/2 of new home buyers who put down less than 20% now choose 35-year amortizations or longer, according to the Financial Post

In many cases, 40-year “Ams” are the only way to get people qualified, says Brian Bell of mortgage insurer AIG.

40-year “Long-Am” products have lowered the cost of borrowing and, according to many economists, propped up Canadian housing prices.  On the other hand, long-term borrowers are padding lender profits with all the extra interest they’re paying.  That has some economists worried because, the more interest borrowers pay, the less they can spend on Canadian goods and services and on retirement.

40-years isn’t where it ends, however.  Some Canadian lenders are now planning 55-year mortgages.  Perhaps someday we’ll even approach the 99-year mortgages commonly seen in Europe.  Only time will tell.

It’s not all doom and gloom though.  Mr. Bell says the average Canadian pays off their 25-year mortgage in 12-14 years by increasing their payments.  (We’re very surprised by this figure and expect repayment periods to lengthen over time.) 

He estimates the typical 40-year loan will probably be paid off in 20 years.

In many cases, our clients have similar intentions when choosing a long-term amortization.  Most of them plan to make extra principle payments throughout the year.  Many simply prefer to keep their obligatory payments low in case their earning power temporarily dips (due to job loss, disability, etc.).

Others get 40-year mortgages because they have to be located in a certain area, dislike renting, and need a long-am to fit within lenders’ debt servicing guidelines.