Perhaps thanks to Mark Carney’s frequent prophecies of financial doom, more Canadians are leaning toward paying off their mortgages sooner rather than later.
A new BMO poll suggests more than half of us (56 per cent) think a shorter amortization period is a good thing, with those aged 35 to 44 the most enthusiastic about throwing their mortgage-burning parties ahead of schedule (77 per cent).
It’s good timing, too, since a couple of the big banks announced this week that they will raise certain fixed-term mortgage rates by as much as one-quarter of a percentage point, and the Bank of Canada is expected to start increasing its overnight rates this summer, moving from 1 per cent to 2 per cent by the end of the year.
Katie Archdekin, head of mortgage products at BMO, said in recent years, the trend was for customers to choose the longest amortization period they could, but that is changing. “People are hearing the message and I think that’s a really positive thing. It’s great that they’re open to the shorter amortization.”
Of course, for new home buyers, a shorter amortization will soon be a fact of life, since the federal government is reducing the maximum amortization period to 30 years from 35 for new government-backed insured mortgages, effective March 18. A shorter amortization means a bigger monthly payment, which can be tough medicine to swallow for those on a tight budget. But to paraphrase Mary Poppins, there’s a spoonful of sugar to help it go down: thousands of dollars in interest savings. For example, on a $200,000 mortgage with a 6-per-cent interest rate, shortening the amortization period from 30 years to 25 years would increase the monthly payment by $90 but would save about $44,000 in interest over the life of the loan. Now that’s sweet.
Ms. Archdekin says home owners should occasionally give their mortgages a stress test by using an online mortgage calculator to figure out what their monthly payments would be if interest rates increased, and seeing how that higher payment would fit into their household budgets. Another good stress test, for those with a variable-rate mortgage, is to consider whether they could afford the going rate on a five-year fixed mortgage. Total housing costs (mortgage payments, property taxes, heating costs, etc.) should not consume more than one-third of household income, Ms. Archdekin says.
Interestingly, the BMO poll, conducted by Leger Marketing, revealed households with children are more likely (70 per cent) to consider a shorter amortization than those without (48 per cent), and men (62 per cent) are more likely than women (50 per cent) to want their mortgage paid off sooner. Ms. Archdekin attributes those stats to the conservative borrowing habits of those demographic groups.
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