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More on 40’s

Mortgage-Amortization In case you weren’t tired enough of the 40-year mortgage debate, here are a few final thoughts…

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People generally choose 40-year amortizations for three main reasons:

a) Flexibility (e.g. in case they lose their job and need to maximize their cash flow)

b) Investment benefits (e.g. better cash flows on income properties)

c) More buying power.

Reason C is the main point fueling the recent debate over 40-year ams.

Yet, it should be acknowledged that if 40-year amortizations did not exist most buyers would instead get the best homes they could afford with a 25-year am. That means:

  • They would still use the same 32-40% of their gross income towards housing.
  • They would still have the same approximate monthly payment

With a 40-year amortization, the difference is that they’d have a higher value home and pay down less of their principal each month. It’s clearly a personal choice on how to spend their money.

No matter what amortization is used, however, Canadian lenders will generally not allow borrowers to spend any more on housing than the standard debt ratios allow. The borrower’s income is the limiting factor, regardless of the amortization chosen. 

40-year amortizations were designed for people who can pay their bills. We have yet to personally see a lender approve an income qualifying mortgage where the borrower couldn’t afford the house. (Stated income may be a different case but that is another discussion.)

So the next questions are…

What effect do increased buying power and increased interest burdens have on our society?

If the net effect is negative, where do we draw the line? Do we outlaw interest-only lines of credit and high-interest credit cards? Do we force people at Best Buy to pay cash for their new plasma TVs? Do we stipulate in the Constitution how much Canadians are allowed to spend annually on interest?

These are not meant to be statements of opinion, but rather questions to ponder.