October 21 is quickly approaching, and while there are many important issues at stake this election, one matter particularly peaks our interest: housing. The Conservative Party of Canada (CPC) and the New Democratic Party of Canada (NDP) have both resurrected the possibility of 30-year mortgages, and there were musings earlier this year that the Liberal government was considering the same. While the CPC has only committed to examining the reintroduction of 30-year amortization periods for insured mortgages, the NDP has pronounced it willreintroduce 30-year amortizations – but only for first-time homebuyers. If the new – or renewed – governing party brings back 30-year amortization periods, what could the implications be?
Extended amortizations are not novel in Canada. In 2008, amortization periods for insured mortgages peaked at 40 years; by 2012, the limit decreased from 30 to 25 years for insured buyers or for those putting less than 20 per cent down.
There are both pros and cons to extended amortizations, and they are often fiercely debated. On the one hand, 30-year mortgages decrease your payments by roughly 10 per cent and afford you the opportunity to purchase a home that costs roughly 10 per cent more than you could acquire under a 25-year mortgage. Thirty-year mortgages also compensate for high house prices, enabling homebuyers the chance to purchase a home that would otherwise be outside their budget. Further, extended amortizations can improve cash flow, freeing up funds for other expenses which, given Canadians’ current spending patterns, are significant. (According to Equifax, total consumer debt increased by 1.9 per cent last quarter, following a 2.6 per cent increase the quarter prior.)
Extended amortizations definitely have their downfalls, too. The longer the term, the more interest you ultimately pay; a buyer purchasing a $777,000 home with 20 per cent down would pay approximately $70,000 more in interest under a 30-year term than under a 25-year term. That’s money that could be put toward retirement savings instead of being paid to the bank.
It’s too soon to speculate as to the likelihood of the return of 30-year mortgages, but regardless of which party forms the government October 21 and the policies they implement, we can help you determine which mortgage solution is best for you.
This article is in the category: General.