The days of 35-year amortizations are over for Canadians, and if you ask me, it couldn't have come soon enough.
With Ottawa's new rules in effect as of Friday, 30 years is the longest amortization now available for new government-backed insured mortgages with loan-to-value ratios of more than 80 per cent.
While I think the new measures are prudent and positive, I think we owe it to ourselves to do better.
When I bought my house in 2003, the longest amortization available was 25 years. Four years later, friends of ours were able to get a 40-year mortgage for their first home. I thought that was insane!
To me, even 25 years seems too long to spend paying off such a huge debt, and it seems most Canadians agree. A recent 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 inclined to agree (77 per cent).
And the numbers suggest we are willing to act on those beliefs. Katie Archdekin, head of mortgage products at BMO, says that while the bank saw a small increase in applications for 35-year mortgages in the weeks leading up to Ottawa's rule changes, more than half of the bank's clients prefer amortizations of 25 years or less, and that number has increased in the past year.
As for me, I've accelerated my payments and will spend only 12 years paying off my mortgage. I'll save thousands of dollars in interest as a result of that decision.
Let's take a quick look at the savings: If you signed a $200,000 mortgage and paid it off over 30 years at 5-per-cent interest (unrealistic, I know, but let's keep it simple), your total interest cost would be more than $184,000 - almost as much as the house itself. A 25-year amortization would increase your monthly payment by about $100 and would save you about $35,000 in interest costs. A 20-year amortization would increase your monthly payment by about $250 and would save nearly $69,000 compared to the 30-year mortgage.
To run the math for yourself, put your own mortgage numbers into the CMHC's online mortgage payment calculator. Once you see what you could save with a shorter amortization, I think you'll join me in saying good riddance, 35-year mortgages!
Here are a few tips from BMO for those considering a mortgage:
1. Make sure you can afford what you signed up for.
Stress-test your budget using a mortgage payment based on a higher rate. Your total housing costs (mortgage payments, property taxes, heating costs, etc.) should not consume more than one-third of household income.
2. Make a larger down payment.
If you can provide a bigger down payment, it's a significant way of helping you pay less interest over the life of your mortgage. With a down payment of at least 20 per cent, you can avoid the added cost of mortgage default insurance.
3. Make pre-payments when you can.
Pay weekly or bi-weekly instead of monthly. Increase your mortgage payment (principal and interest) as much as possible.