The “trap” of diversifying your mortgage over 30 years

This article was translated from from CTV News content.

Even though monthly payments are lower, longer amortization mortgages come with a significant increase in the amount of interest homebuyers pay over time.

“The banks are going to be a disaster,” said Marc Nixon, vice president of commercial mortgages at TN Financial Group.

Many first-time buyers buy their first home at age 40, Mr Nixon said. “This means that the retirement age has increased from 65 to 70,” he said.

Expanding the amortization of insured mortgages is one of several measures introduced by the federal government to try to make housing more affordable in Canada.

“It’s about making first homes more affordable for young Canadians, for first-time home buyers,” said Chrystia Freeland, federal finance minister, on September 16.

That extra five years could help some first-time homebuyers get into the market, but at an extra cost.

Mr. Nixon calculated how much extra interest a person can expect to pay if they move from a 25-year mortgage to a 30-year mortgage.

The total interest paid on a $950,000 mortgage at an interest rate of 4.5% was:

• About $492,441 for amortization over 20 years;
• About $634,123 for amortization over 25 years;
• About $782,864 for a 30-year amortization.

The monthly mortgage payments for each amortization period will be as follows:

• About $6,010 for amortization over 20 years;
• About $5,280 to amortize over 25 years;
• About $4,814 for a 30-year amortization.

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Mr Nixon says the 30-year amortization plan is good news for developers and bankers, but ultimately homebuyers will pay the price in the form of extra interest charges .

Using the previous example, anyone who moves from a 25-year amortization to a 30-year amortization will pay $466 less in their monthly payments. However, it will take another five years to repay his loan, with an additional $148,471 in interest charges.

Ron Butler, a mortgage broker with Butler Mortgages, told CTV News that he thinks a 30-year mortgage is unfortunate, but necessary.

In the United States, Americans are allowed to deduct the mortgage interest they pay on their homes from their taxes, an idea Nixon said could benefit Canadians.

“They do it in the United States, I don’t know why they don’t do it in Canada. The prices are becoming so unaffordable that it is discouraging for our youth,” Mr. Nixon believes.

Extending mortgage terms may help some Canadians enter the housing market, but it’s important to do the math ahead of time to figure out how much five more years will cost. With a 30-year mortgage, buyers can try to make extra payments each month, or when possible, try to reduce the balance.