CAN AMORTIZATION HELP RISING CONDO PRICES?
Condos in Toronto are also being marketed as the affordable housing alternative. But prices are now rising for condos at the same rate as houses. So how can first buyers crack the market?
Consider a mortgage with a 25 year amortization rate. (Amortization is the time it takes to pay off a loan with the same fixed payment and interest rate.) The monthly payments for a $200,000 mortgage are $1279.61 at a 6% interest rate. Last year, the Federal Government allowed lenders to increase the maximum amortization from 25 to 40 years. That means if the lender allows a buyer to spread these payments over 40 years, the monthly payment would drop to $1090.18. A saving of $189 a month. That's good news for people with low incomes trying to qualify for home ownership. At the same time, this extended period will mean that buyers will also end up with thousands of dollars in extra interest payments.
Is this the end to extended amortization periods? Why not 50 years? In Spain, you can now get mortgages with 100 year amortizations. We all know that people don't live long enough to pay off that kind of mortage. Now we have new meaning to the word 'inheritance'! Not only does the next generation inherit the property but they also inherit the debt!
Generally, Canadians are a conservative bunch, but it is just a matter of time before we have the 'never pay it off' mortgage.
Consider a mortgage with a 25 year amortization rate. (Amortization is the time it takes to pay off a loan with the same fixed payment and interest rate.) The monthly payments for a $200,000 mortgage are $1279.61 at a 6% interest rate. Last year, the Federal Government allowed lenders to increase the maximum amortization from 25 to 40 years. That means if the lender allows a buyer to spread these payments over 40 years, the monthly payment would drop to $1090.18. A saving of $189 a month. That's good news for people with low incomes trying to qualify for home ownership. At the same time, this extended period will mean that buyers will also end up with thousands of dollars in extra interest payments.
Is this the end to extended amortization periods? Why not 50 years? In Spain, you can now get mortgages with 100 year amortizations. We all know that people don't live long enough to pay off that kind of mortage. Now we have new meaning to the word 'inheritance'! Not only does the next generation inherit the property but they also inherit the debt!
Generally, Canadians are a conservative bunch, but it is just a matter of time before we have the 'never pay it off' mortgage.
posted by RemaxCondosPlus at
1:14 PM
3 Comments:
Did you know that a survey carried out for the Canadian Association of Accredited Mortgage Professionals showed that 37% of Canadians who took out a mortgage last year had an amortization period of more than 25 years!!
Further in this survey, it found that 81% of borrowers were happy with the terms of their mortgage, primarily because of good interest rates and of course longer amortization periods, which made ownership easier.
I understand that several European countries, like Denmark have "all interest" mortgages, where no principal is paid for the first 10 years. But then at this time, people just keep renewing it with another 10 years of no principal, so they actually never pay anything off, but count on the increase in property value.
But doesn't everything have an end?
Once we hit 100 year amortization, and you never pay any principal off and prices have risen so high that first-timers can't get in at the ground level - then what?
Another possibility which I understand happens a lot in Vancouver is that bigger homes get broken down into many smaller homes, e.g. triplexes or stacked townhomes to make them more affordable.
I think the only option which remains will be lowering people's expectations of home ownership.
Hi Jamie,
I wouldn't be shocked if the proportion of 30+ year amortizations hit 50% in a few years. A lot of people still don't know they're an option. It amazes me how fast people are flocking to them.
Melanie
My Virtual Mortgage Broker
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