If you own a home and were offered a shorter mortgage term, would you do it? Let’s say that the shortest mortgage term was cut down to 25 years, down 5 years from the maximum amortization period of 30 years, which currently stands. If you answered “YES” to having a shorter mortgage term, well then consider your self as “Part of the Crowd”. According to a survey by BMO, more than half of Canadians would be open to a new shorter mortgage term. Who would have thought?
Despite that there are drawbacks to a shorter mortgage term, the positives outweigh the negatives. One would save thousands of dollars in interest annually and even more over the term. More money would go towards your principal, as opposed to the interest. Also, according to the survey conducted by BMO, 77% of the respondents were aged 35 to 45. Furthermore, 70% of families would consider a shorter mortgage term, as opposed to only 44% of singles would entertain the idea. (Source: Canoe Money.ca)
Not too long ago (April 2010 to be exact), Canadian government cut the maximum mortgage term to 30 years, down from the ridiculous 35 or 40 year terms. After all these same 35 & 40 year terms, is what got our neighbours, south of the border in trouble, where they are still reeling from one of the worst recessions in history. Having a maximum term of 30 years, means the homeowner will have a higher monthly payment, but will save over the long run, with more of the monthly payment going towards the principal, instead of the interest.
For example on a $250,000 mortgage at 6% interest rate, a homeowner can save about $55,000 by having a shorter term of 25 years, as opposed to a 30 year term. Now you see, where it all comes in. (Source: Canoe Money.ca). With this extra money a homeowner towards retirement and other investments.
Currently the Canadian Government is entertaining the idea of cutting the maximum lending time, down to 25 years, from 30 years. As more than half of Canadians agree it’s a positive step, benefiting the homeowners, there are drawbacks to it as well. Higher monthly payments and harder to obtain a mortgage, for the first home buyer. The two work hand in hand more or less. If the term is cut down, it will make it harder for some potential home-buyers to get a mortgage, because they will have to make that up either with a larger down-payment or simply will not be able to afford the home they want, because the math of calculating a mortgage will be against them. Secondly, for those who renew their mortgages or new mortgage applicants, the monthly payments will be higher, because your mortgage is amortized now over 25 years.
If less people enter the market of home ownership, it would slow the market down, because a significant amount of monthly or annual how sales, are by first home buyers. Secondly, with those renewing their mortgages and having to pay more up front (higher monthly payment), will ti benefit them? Will they be able to afford? or will they have to dip into their credit for help? Either way, its an interesting debate, with great positives on one end, but also heavy possible drawbacks.
How long is your mortgage term? and What do you think of the Government introducing a maximum 25 year mortgage term?
I understand where the government is coming from.
HOWEVER technically the 30 year amortization maximum isn’t yet in effect. It does not start until March 18. So my feeling is this. Give people time to adjust before they make more changes.
I can certainly understand why changes need to be made because I definitely do not want to see the meltdown that happened south happen here. I live in a hot real estate market, prices here are pretty ridiculous but by that token they will not see the same cooling off that other markets will see with these changes. This just makes it that much more difficult for a middle class family/couple to buy a home with such strict rules.
BF and I just sold our condo and bought a house. We purposely closed before the March 18 deadline so that we could get a 35 year amortization. This house is going to be an investment property that, for now, we will live in but to get it we needed that 35 year term. In 5 years when we renew it will be with a much shorter term.
Yeah I know it does not go into effect until about two weeks roughly, but figured I'd throw it out there and see what people think. Like your self, when I bought my condo, I did it over 30yrs, but when I renew I will def. go with 25. Your long term makes sense in BC, becaues homes prices are too high, aka inflated. Conrats on the home and thanks for the comment!
Hmm just to clarify when one renews, SHOULDN'T it be at a shorter term?
E.g. You get a 30 year amortization, 5 years later, you are up for renegotations… then it should be a 25 year amortization (vs another 30 years). Then 5 years later, it should be 20.
If one just continues renewing at 30 for 15 years, then basically the interest paid to the bank is higher and higher, no?
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You have your amortization of 30 years for example, locked in for 5 years. When you renew at the end of 5 years, you can amortize "X" amount left on your mortgage to another 30 years. This way, you free up more money (cashflow) now, but pay more interest because it's amortized over 30 years again.
My view on a mortgage is that one should try to be mortgage free as fast as they can handle it. Once you have no mortgage, it's a whole different world. It doesn't mean that you don't do RRSP or RESP and such. It just means that you should not just increase your cash flow to indulge and live a life you can't really afford. It's so easy to keep a mortgage with a longer amortization … The bank will advocate it but they are the ones profiting from it.
Your title mentioned shorter mortgage term but the content is about amortization of a mortgage. I also believe in not taking 5 year terms for mortgages. You usually have higher interest and the penalty for making a change is higher. I like 3 years (although I am with prime right now) and then you blend and extend after 2 years if the rates change. It allows you to better leverage the changes in the interest rate world.
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