Extended amortization periods..Good Idea?
Canada’s “big gun” has now got involved in the 30 year amortization game.
CMHC (Canada Mortgage and Housing), through a pilot partnership with FirstLine Mortgages is now offering a 30 year amortization period. While it is not the first mortgage offering a 30 year amortization in Canada, it is the first time CMHC has been involved.
In the past, purchasers would be required to have, at least, a 25% down payment before being considered for a 30 year amortization. Now, through this partnership announcement, purchasers can get a 30 year amortization period with as little as a 5% down payment.
The benefit of the program is that it now opens the door to a whole new group of potential purchasers who might otherwise not be able to enter the housing market.
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By extending the amortization period, monthly mortgage payments are reduced. As an example, a borrower with a mortgage of $200,000 with a 25 year amortization period and 5.50% interest rate would pay approximately $1,221 per month. By extending the amortization to 30 years that same borrower would only have to pay approximately $1,128 per monthly, a savings of $93.00 per month.
While the eligibility requirements are the same as mortgages having the standard 25 year amortization periods, there is an additional mortgage insurance premium of 0.20%.
If you are considering the program, don’t forget one thing…
No matter how appealing the lower monthly payments look, don’t forget that you have to repay what you borrow, so the longer the amortization period, the more the interest.
While extending the amortization period in the previous example reduced the monthly payment by $93.00, the total cost of the mortgage increases from $366,234 to $406,013 or $39,779. That’s a new car!
My personal advice, take the shortest amortization period you can afford. If that’s a 30 years amortization period, then its 30 year amortization period. Don’t increase the amortization period just for the sake of getting a lower monthly payment.
At the time this article was written, the program was restricted to FirstLine Mortgages, however, additional lenders will continue to jump on board.
If you have any questions about this program or any other mortgage programs, don't hesitate to contact us. A member of our mortgage approval team is there to help. No pressure, no obligation!
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