40 Year Mortgages


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40 Year Mortgages

In early 2005 with great fanfare and pontificating statements about saving mother earth and linking the currently popular green concept to the mortgage market, Canada Mortgage and Housing Corporation announced the 35 year mortgage. Great idea, .. ya think? At the time, to some it was considered an innovative and bold move. The lower monthly payments (note how these pundits always use the monthly payment as the example) would allow a borrower to purchase energy saving improvements for the home. In view of this dubious announcement CMHC still views itself as the vanguard of the mortgage protection agency! This move seems to have started a benevolent trend to help borrowers. It seems that everybody wants to be involved in the mortgage market whether it is catering to prime borrowers or sub prime borrowers! In early October of 2006, the Bank of Nova Scotia started offering 100% mortgages (albeit with higher mortgage insurance premiums). A week later Genworth Financial Canada announced the 40 year mortgage. I can understand the concern about the real estate bubble and the need to keep the realty market booming BUT the longer amortization period mortgages are starting to converge on interest only loans which is financial foolishness!!! The best mortgage of all is no mortgage. Think of all the wonderful things those mortgage payments could do for your family or investment portfolio if they were not going to a Lender.

Lets use a $100,000 Canadian mortgage (semi-annual compounding) as an example at an annual interest rate of 6% and compare the monthly payments for amortization periods from 5 to 50 years. The monthly payments are reluctantly chosen for simplicity (even though the accelerated weekly payment is the ONLY way to go in order to save on interest costs) and the monthly payments are rounded up to the closest dollar.

Some of the pundits in the mortgage industry predict eventually the amortization period on mortgages will be 50 years as a rule rather than the exception. The table shows, if that prediction comes true, eventually most Canadians unknowingly, will essentially have an interest only mortgage.
The silver lining in this prediction is that more people will be in the home owner market, building equity (albeit, initially very little) instead of flushing rental payments down the toilet. The good news is, eventually these new home owners will learn of the weekly payment plan and realize mortgage debt can be paid off sooner and save on interest costs!