Article
July 22, 2009
Power to the people
40-year amortization option opens doors to more homebuyers
In late February 2006, Canada Mortgage and Housing Corporation (CMHC) announced that they will be offering to insure 30-year mortgages—a significant shift from the usual 25-year limit for most Canadians. What was planned as a four-month pilot was so successful, that in late June, CMHC rolled out plans to make this feature ongoing. Plus, it introduced extended mortgage amortization periods of up to 35 years. Then in October, Genworth Financial further increased access to homeownership with the 40-year amortization!!
What does it all mean? It means lower monthly payments and better cash flow for Canadian homebuyers. Amortization period—the factor in the calculation for mortgage payments, representing the overall length of time available to pay off the entire mortgage—is a significant factor in the size of the monthly payments. The extra five or ten years now available to pay off a mortgage can make a significant difference to the household cash flow of Canadians and help in buying power in a market such as ours.
Let’s say that a young couple looking for their first home can manage only $1,100 to spend on a monthly mortgage payment. They’ve found a home they love, but it means carrying a $190,000 mortgage. They’re just starting out in their jobs, and they know they shouldn’t exceed their budget. But with current interest rates and an amortization of 25 years, their monthly payments will be almost $1216, possibly placing the home out of reach. But if they extend their amortization to 35 years, the monthly payments drop to about $1084 and fall within their budget.
The longer amortizations have a premium surcharge with the insurer, slightly higher than the 25 years available now, but many homebuyers have the ability to increase payments and shorten their amortization at a later date—not to forget that on average, most Canadians move or refinance every five years, which means new factors, interest rates and restructuring of payments anyway. For many Canadians, the real problem period is those first few years they are getting their financial feet under them.
CMHC and Genworth Financial have recognized those monthly payments are a key obstacle in affordability, and longer amortizations are designed to address the problem. Lower monthly payments mean a better chance at owning a home, better cash flow if you’re concerned about month-to-month expenses, and more house for your monthly payment. The longer amortizations are not for everyone. But if you’re in the market for a new home, and want to explore your options for mortgage payments based on these new products, you’ll want to get in to see an independent broker soon! This is yet another new incentive that opens the door to more Canadians who are working hard to achieve home ownership. NL