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Extended Amortizations Have A Place

We’ve been hearing a lot about the “evils” of 40-year amortizations lately.  People like Garth Turner have gone so far as to equate them with subprime mortgages.

They do have a place, though, and it’s becoming clear that the debate is in need of balance.

Peter-VukanovichPeter Vukanovich, President of Canada’s 2nd largest mortgage insurer, Genworth Financial, talks about 40-year ams. in a recent issue of the Hill Times.

Vukanovich says concerns about extended amortizations “are misplaced.”  Long amortizations “should not be confused with subprime mortgages,” he says.  “Unlike subprime loans, extended amortization products are intended for ‘prime’ borrowers with a good credit history.”

Vukanovich cites three examples of borrowers that are well suited to 40-year ams.:

  • Early-career borrowers with higher income earning potential
  • Those who anticipate other significant short-term expenses
  • People trying to buy into higher priced urban markets

Add income property investors to the list as well.

Granted, the stated interest on 40-year amortizations is huge versus the 25-year variety.  But it’s the effective amortization that’s most important suggests Vokanovich.  He notes that most Canadians pre-pay their mortgage well ahead of time.  (Although probably not the ones destined to default – Ed.)

Doing something as simple as moving from monthly to accelerated bi-weekly payments cuts a 40-year amortization down to 32 years.  Applying lump sums (like tax refunds) can save tens of thousands of dollars more.

In the end, 40-year ams. probably won’t spark mass defaults or the implosion of Canada’s real estate market.  The “correction” will likely be economy driven.  So until there is evidence to the contrary, 40-year mortgages will keep being promoted by lenders and keep being eaten up by the public.