Over 30-year mortgages puts that first home within reach
Let's call them John and Julie. Recently married, they're still struggling
to pay off student loans and the new car they've just purchased.
John and Julie have moved into a nicer apartment, but are
watching their rent money go out the window while their
more established friends enjoy the rise in the value of
their homes. Interest rates are enticingly low, but John
and Julie still aren't sure they can handle mortgage payments,
even though they feel that they're missing out on a great
opportunity in today's market, and they do want their own
place to decorate and enjoy.
There's good news for John and Julie. Homebuyers can now stretch mortgage amortizations
- the length of time calculated to pay off a mortgage -
to 30, 35 and even 40 years. Not too long ago, it was almost
impossible to get a mortgage amortization for more than
25 years. In 2005, the Canada Mortgage and Housing Corporation
(CMHC) announced that they would insure 30-year mortgages
with only 5% down in a special pilot project. The move was
calculated to help Canadians like John and Julie get into
their own home. Canadians went house shopping and took advantage
of the opportunity, causing CMHC to make the 30-year mortgage
part of their ongoing product offering and even extending
amortizations to 35 years. In the spring of 2006, a 40-year
amortization mortgage was introduced to the marketplace.
The rationale behind longer amortizations is simple; they help bring down the
cost of monthly payments and bring home ownership within
reach for young couples, new immigrants, self-employed Canadians,
or prospective homebuyers with less-than-perfect credit.
They are also good news for homebuyers who are struggling
in an area where real estate prices are rising rapidly,
or need a solution to help them through a tough financial
period.
What kind of difference can homebuyers expect? Well, John and Julie hope to
take out a mortgage of $250,000. At a rate of 6%, they would
need to find $1600 per month to service the mortgage on
a 25-year amortization. But they need only $1487 for a 30-year
amortization or $1413 for a 35-year: similar to what they
are currently paying for rent. Their mortgage planner can
help them factor in any additional costs, but these longer
amortization mortgages put mortgage payments within reach.
They do increase the amount of overall interest paid, which
is why they shouldn't be considered to simply reduce your
monthly payment if you can afford a shorter amortization
period.
So why would anyone want to spend over 30 years paying for a home and pay more
interest in the long run? With good mortgage planning, it
doesn't have to work out that way. The long amortization
period helps new homebuyers get into the housing market
at a lower threshold. As John and Julie finish paying off
their loans, and as their income increases, they'll be able
to shorten their amortization period and support a larger
monthly payment. But until then, they'll have an early advantage
that allows them to enjoy their new home now and begin building
home equity; otherwise they'd be watching their monthly
rent payment work for their landlord rather than for them.
And that - says John and Julie - is a great beginning.
