40-Year Ams…Pros/Cons

Mortgage-Debt Million Dollar Journey says “if you can’t afford a 25-year mortgage on the home that you want, then the home is too expensive.” 

For some clients, and in some markets, there’s truth to that.  Moreover, it’s also important to note that, versus 25-year amortizations, 40-year Ams. cost you:

  • Considerably more interest
  • 0.6% more in insurance premiums if loan-to-value > 80%
  • Interest on those premiums (usually)
  • Potentially higher pre-payment penalties

In some cases, however, 40-year Ams. are warranted.

In high demand areas for example (e.g.  Vancouver, Calgary, Toronto), inflated prices leave many buyers little choice but to up their amortization.  (This assumes they don’t want to rent, which can also be a good economic choice.)  We continually see clients who would never get approved without a 40-year Am.–because it lowers their payments–and debt ratios)

40-year Ams. are also good for folks with uncertain incomes.  In this case, a longer amortization allows for lower payments–which helps people weather dips in income.  When times are good they can make prepayments to bring their Ams. down to 25 years or less.

It’s also important to note that 40-year Ams. are sometimes great for investment/income property buyers.  Rental clients use them frequently because:

a)  The extra interest is tax deductible
b)  It’s easier to generate a positive cash flow
c)  It allows them to reinvest in the property, or in other assets

  1. And not an ounce of looking at the consequences of higher interest rate resets…
    Shallow, self-serving blog = delete from reading list.

  2. Deborah,
    This is an open forum so we try not to censor comments, although it would be nice to keep it civil. All fair comments and criticism are welcome because it helps everyone learn. It also helps fill in the blanks, if any. We don’t profess to be flawless writers, although CMT does its best to present a range of perspectives and be objective. You make a point about interest rate resets. It would be nice if you could elaborate on this for the benefit of the community, since you clearly feel strongly about it.
    Rob

  3. Deborah I couldn’t disagree more with your statement. I’m a broker and I’ve always found Mortgage Trends to be very fair. From what I’ve seen the site is quite unbiased and gives lots of press to their competitors.
    /Marlene

  4. Your point of “0.6% more in insurance premiums” is only true if the mortgage is insured through CMHC/Genworth/Etc, is it not? If you put 20% down, this premium is not applied.

  5. While it is true that for many the only way to get into some of the hot markets is to sign up for a 40 year Ams., I would tend to argue that perhaps part of the reason why the markets have remained as hot as they are is because of these 40 year Ams. If it was not possible to get anything beyond 25 years then things would have cooled long ago as most home buyers cannot afford the prices in these hot markets with the standard 25 year Ams.
    IMHO :)

  6. I see no problem with 40-year-ams (or 10,000 year ams) as long as people go in with their eyes open, which most do.
    The fact is that these products make it possible for people to buy when they would be otherwise unable to do so. For that reason, they’re nice to have around.
    If an individual can understand something and commit to it, it’s pretty paternalistic to say they’re being tricked or taken advantage of. I’m sure most buyers in Vancouver aren’t thrilled about real estate prices, but if you want to own, you have to pay the asking price.

  7. Hi Melanie and Rob,
    I’d totally disregard Deborah’s remarks. These types of comments = rude ….since we’re mixing math and English. :)
    You guys are doing a great job.
    Kat

  8. Hi Michelle,
    Thanks for the question. The length of time you live in a home is not a primary influence on your amortization. It is more likely to influence your term (i.e., affecting your choice of a 3-year fixed, 5-year fixed, or 10-year fixed, etc.).
    It might be worthwhile to consult with your mortgage planner or bank specialist. They can suggest the right amortization based on your cash flow needs.
    Cheers,
    Rob

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