Considering that we’re living and working longer, it just makes sense for homebuyers to have the option of amortizing a mortgage over 30 years instead of the standard 25.
The federal government recently announced that starting Aug. 1, 30-year amortizations will be available to first time home buyers who have a down payment of less than 20 per cent and will purchase a newly constructed home. If you have a down payment of 20 per cent or more, you were already able to spread mortgage payments over 30 years. People buying resale homes without putting 20 per cent down are still restricted to 25-year amortizations.
The benefit of a longer amortization is lower monthly payments, but there’s a significant cost in extra interest paid over the life of the mortgage. The real estate website Zoocasa has done a 25- versus 30-year amortization analysis for cities across the country. Here’s how the numbers shake out for a house purchased at the national benchmark price of $729,700 in March.
With a 20-per-cent down payment and a fixed mortgage rate of 4.79 per cent, Zoocasa calculated that the monthly payments on a 25- and 30-year mortgage, respectively, would be $4,157 and $3,803. The total interest paid over 25 years would be $517,449, which compares to $639,500 for 30 years.
What personal finance expert could possibly be OK with paying $122,051 more in interest to save $354 per month? Uh, I’m fine with it if someone is hell-bent on home ownership and that’s the only way they can afford it on a month-by-month basis. Unless you have rich parents or a healthy six-figure income, the personal finances of home buying in many cities are messy. You either opt out of home ownership, or you accept high prices and mortgage costs. Also, the way our housing market works, saving longer to build a down payment and reduce monthly payments means running the risk that prices will keep pushing higher.
Extended mortgage amortizations make a heck of a lot more sense than the long-term loans people are using to buy cars and SUVs these days. J.D. Power’s latest snapshot shows that 57 per cent of new vehicle loans in April had a term of 84 months or more. Let’s remember that homes appreciate over time, while vehicles depreciate.
Every homebuyer should have the option of amortizing for 30 years in a world where people are commonly living to age 90 and up. Immediately extending this option to everyone would likely attract more buyers and thus higher prices that further undermine affordability. But let’s not rule it out permanently.
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Results of a survey of Carrick on Money newsletter readers on how much they spend on home maintenance. Use this spreadsheet to find out the cost of replacing a roof, furnace and driveway, and routine maintenance.
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Ask Rob
Q: Do you have any recent columns or advice on credit cards for teens? My daughter is 17, and is a responsible spender. I’d like to get her a credit card, but every time I try to research I get lost. So many options.
A: For an answer to this question, I turned to Patrick Sojka of RewardsCanada.ca: “To the best of my knowledge there is no credit card available on its own for kids under the age of majority in each province. You can get them supplementary cards from the parent’s account (that’s what we did in our family) and the minimum age for supplementary cards varies depending on the issuer but they tend to range from 12 to 15.”
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