40-Year Am’s Supporting The Market

Supporting-Canadas-Housing-Market Higher mortgage costs are slowing Canadian housing starts.  If it weren’t for long-term amortization, however, the hit would be much bigger.

RBC economist Derek Holt says, “It’s my belief we would be 10 to 20 per cent below 200,000 housing starts next year if it wasn’t for the impact of these mortgage innovations.” 

Holt estimates that 30% of all new insured mortgages are for 40 years.  60% are for over 25 years.  Until recently, a 25-year amortization was the Canadian standard.

Borrowers beware: The interest on a long-am mortgage will sting if you don’t make extra pre-payments.

  1. I’d hate to see the bubble that builds when Canadians get hooked on interest only mortgages. With home prices inflating the way they are, it’s only a matter of time.

  2. I agree Devon. Though I took a ‘long AM’ loan so I can’t quite say that I’m not adding fuel to the fire, my home is still only valued at about 2.4 times my salary alone. At the time of purchase my S.O. was in school, so we took the 35 year loan with a prepay option of 20% (25% increase payment) to keep our minimum low while she finished up. If everything goes smoothly (as it rarely does) we should have the place paid off in 8-10 years, 12 if it’s a little bumpy, and 15 if it’s rough. Hopefully at that point we’ll be living our stress reduced debt-free life.
    Here’s hoping :)

  3. If a longer mortgage lets me buy the house I want and make my family happy then that’s exactly what I’ll get. Saving money is important but so is enjoying life.

  4. J.P. I tend to disagree. If you can’t afford the house in less than a 40 year AM, I don’t think you can afford the house. Mortgage rates will change over 40 years by fairly drastic amounts (As seen by the recent post on this blog of historical rates) to make things far less affordable.
    For instance say right now you can make a payment of $1000 a month on a mortgage. That puts you able to pay for a 158000 house over 25 years at 5.88%. 179000 at 35 years and 186000 at 40 years.
    Do you really think your family is going to be that much happier in a place that’s a couple grand more, or a place you call home and are less stressed to pay for. In this case, why not buy a place that’s 129,000 over 25 years and save the difference or not work as much and spend more time with your family.
    Because you don’t have a double car garage is not going to make you a better or worse family member.

  5. If I can make the payments then by default I can afford the house. If you could see what $158,000 buys in my neck of the woods you could answer your own question.

  6. I have to disagree again. The real point that you missed is the difference being marginal between the amortization schedules vs the relative family happiness. The other point was I believe there is a huge difference between affording a home and the ability to pay.
    Sure you may be able to pay for a mortgage payment of 2500 on the mortgage for a 389,000 house, but do you think your family will be any happier in a 465,000 [for 40 years] house? You’d need a family income hovering around 90K or more to afford this in either case.
    Will they be happier when your retiring and they have to pay your mortgage because you’ve had payments for 40 years and are retiring at 71 just to scrape by and you financed at 31?
    Now granted, I spent 102K. I live in an area where people are rational about home prices. Looking on MLS for homes around 389K we have a 2900 sq ft bungalow, a 4000 sq ft two story, and a 3600 sq ft bungalow. My place is a modest 1150 sq ft, however . . . my kids can walk to school up to grade 8 (Not in school, and Grade 1 now), we can walk to a local library, movie theatre, grocery store, and mall. Sure, it’s no palace, but more than any family of 4 needs.
    I chose the 35 year schedule because at the time my S.O. was in school with no income, and now has decided to try to start her own business in her field. The mortgage approval was based on my income alone and once she gets all ramped up, if we can get our family income over 80K we will hopefully have the place paid off in 8 or fewer years. If we can pull it off in under 12 our house will be paid for and we’ll be less than 40 years old. The kids will be out on their own before we’re 45-50 and we’ll have half a life to relax and do what we really enjoy. Oh, and the rain will turn to champaign, and we will dip our strawberries in our chocolate river. . . ;)
    I guess I’m kind of rambling here, but I stand by my first statement that if you can’t afford the place in 25 years, you can’t afford the place. Either buy something more reasonable, or save more up front. Possibly just casually search for jobs in cheaper areas and move when one you think you’ll really like comes your way.
    Though, if your plan is to prepay and have flexibility if you are buying a house you can afford then long terms can be helpful. Always keep in mind, that the longer you pay money to a lender, the longer they own your life.

  7. Chocolate-dipped strawberries. Yum!
    Based on the applications I see daily, you are definitely in the minority Traciatim. You are a model saver and Canada needs more savers like you to provide investment capital and grow our economy.
    That said, it’s tough to knock people in general for wanting (or needing) a lower mortgage payment. There are just so many factors that come into play. Picking up and moving away from your family and job isn’t always practical (unless you’re part of Canada’s “mobile economy” of course)!

  8. No, it sure isn’t always practical, but then again, neither is buying a $450,000 house.
    I wouldn’t call myself a model saver, I’m mostly a consumer like everyone else. I just have a plan. I have a company matched RRSP, 2 RESPs, and a home. The RESPs have enough funding to pay probably for half of university for each of my kids. It’s more than I had when I went to college. The RRSP along with my spouse should keep us retired at a comfortable level. I’m 28 and she is 26, so we have tons of time for plans to change and bumps in the road to happen.
    We may end up later on moving to a larger home when the kids are teens and then we’ll be just another debt ridden family. Though I would really like to avoid it (since we have a basement ripe for the finishing) and keep the plan, no one knows what the future will bring.
    I really think people buying in places where the average home is over 5-6 times the median family income are just asking for disaster. Unless of course their salaries are enabling the purchase, not fancy financing options.
    What happens when oil drops back down to 65 bucks a barrel once bush is out? The USD will recover some, the oil will be worth less money, and the west won’t be booming [as much]. Will the home values stay sustained or growing? No one really knows, but I sure wouldn’t be betting 450K that I don’t have on it. I’m a pretty risky investor (since I Have the time to recover, and I’m young and stupid and haven’t had the time to learn from my mistakes yet) but I think that’s just a bad call all around. Hopefully I’m wrong and Canada just keeps on flourishing.

  9. Okay people lets be realistic. It is pretty hard to find a home under 300,000 in a populated area area. For my self we need to live in a larger community cause that is where the work is. To buy a old crappy townhouse about an hour from downtown Vanocuver your looking at 250,000, in a run down bad area. So to get into a clean and safe area to raise your children you have to spend over 350,000. Well the only way I can afford this is to have a 40yr mortgage. It sucks cause I dont want to be 70 and making a 2400 dollar monthly mortgage payment but I have no choice if I want to live in a neighbourhood where my kids are safe. Let alone with the cost of gas and food now, how come my wage has only gone up a whole buck in 3 years. It sucks living paycheck to paycheck but there is no such thing as middle class anymore, there is only the wealthy and the working poor. The government needs to step in and make these large corporations start paying their employees proper wages. There is a staggering rate of young families drowning in debt because they are struggling just to live everyday. I make sure my kids have a roof over their heads and food on the table and well if I starve and cant afford to buy clothes for myself other than Value Village than I guess I have no choice. There is no end in sight.

  10. I’ve had enough of people telling you how to spend your money. Everyone is an expert with other peoples money. If I need a 40 year amort. to live in a nice house in a nice part of town I could give a rats a$$ what other people think. As long as I pay my bills get out of my face.

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