Recent changes in by the government has reduced amortization on insured mortgages.
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In Canada, we are fortunate that our successive governments have always forced higher down payments for homes here than those required in the U.S. With the new limits on the amortization period, our government wants to dodge the American crisis. This is prudent, and safeguards the economy in general. But the new limits are also good for the individual home owner.
Let’s do some arithmetic. Consider a $100,000 mortgage. (Most mortgages are much larger, but you can get to the answer to your personal situation easily by multiplying by the size of your mortgage.) I will assume today’s five-year mortgage rate of 5.24 per cent.
If you take out a mortgage to be paid off over 30 years, your monthly payment will be $548.10. Over 30 years, you will pay a total of $197,316, including $97,316 in interest. If, however, you choose the 25-year mortgage, your monthly payment is $595.34 ($47.24 more a month). Over 25 years, you will pay a total of $178,602 – $78,602 in interest, just 80 per cent of the interest you would pay on the 30-year mortgage. Further, you will own the house debt-free five years sooner.
If interest rates rise, the arithmetic becomes more dramatic.
Consider a $500,000 mortgage at 6 per cent. If you choose the 30-year mortgage, you pay $2,974.12 a month for 30 years, a total of $1,070,683, including $570,683 in interest. Using a 25-year mortgage requires monthly payments of $3,199.03 ($224.91 more a month) for a total payment of $959,709, including $459,709 in interest.
In other words, for an extra $7.39 a day, you can own your house five years sooner and pay a whopping $110, 974 less in interest.
If a home buyer cannot afford an extra $7.39 a day in mortgage payments, should they be in the market? Aren’t we all really better off with the shorter amortization period?
Acceptable loan purposes:
- Purchase transactions up to 95% FREE DOWN PAYMENT MORTGAGES AVAILABLE
- Refinance for repayment of existing financing debt consolidation, renovation & asset enhancement
- Up to 90% LTV; equity takeout limited to $200,000 cash over and above mortgage debt
- Where the loan purpose is to consolidate existing first and second mortgages, the maximum LTV 90% will apply