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?