Could 30 be the new 25 for Canadian mortgages? Well, no, at least not mortgages covered by CMHC. But in the world of low-ratio mortgages in Canada, a 30 year amortization period has become more common.
And while many Canadians feel extending the amount of time given to pay a mortgage isn’t a wise practice, many need to go with the stretched option.
A low-ratio or conventional mortgage is one that has 20% or more in equity (down payment)
Only low-ratio mortgages can qualify for an extended amortization (over 25 years)
In fact, over 60% of new low-ratio mortgages in Canada are over this well-known standard. These extended mortgages are lender-specific, though, and some of the big banks or prime lenders don’t even offer them; meaning, you will have to search out lending institutions that are willing and able.
The main draw of the 30-year amortization period is lower mortgage payments. However, this is a sort of catch 22. The mortgage payments are about 10% lower since they are spread out over a more extended period, but you will pay roughly 20% more in interest over the life of the mortgage. You must consider that the interest rate will be higher than that of a 25-year amortization and it will take longer to build equity.
Numerous factors fuel the fire here. Home value escalation and overspending are two of the most prominent reasons for Canadian home buyers and mortgage holders alike.
As home prices have risen substantially over the last decade, Canadian incomes haven’t been able to catch up, leaving little choice when it comes to longer amortizations. For many, waiting to qualify for the 25-year standard brings fear of not getting into the market at all.
It’s all too easy to fall into incredible debt these days. Taking into consideration student loans, poor spending habits further enabled by easy access to online shopping, and the rising cost of living, drowning in debt has become the norm. Canadians are spending more, saving less, cutting mortgage payments, and now extending amortization periods.
RBC Mortgage Specialist Nicole Daoust advises that, in her experience, although circumstances may cause people to consider a 30-year amortization on their mortgage, extended amortizations aren’t for everyone. Here are some examples Daoust gave of those who would benefit most:
First-time buyers who were gifted or inherited their down payment but whose income can’t meet the mark for a shorter amortization.
People who have lost a loved one and have accumulated debt or those whose mortgage is coming for renewal and need to pay down debt loads.
Those who have irregular income such as the self-employed or someone taking maternity leave.
A 30-year mortgage works for in some of these circumstances people because it allows people to pay their mortgage and still afford to live comfortably.
“Let’s face it; people live day-to-day. Money in, money out,” says Nicole Daoust.
If a lower payment makes for a sustainable mortgage, it works great. The saving grace is that it doesn’t have to stay that way. The amortization at the time of your mortgage renewal can be changed. Get in touch with Nicole for expert advice on a mortgage that’s right for you!
Nicole Daoust | Mortgage Specialist | RBC Royal Bank | Royal Bank of Canada | 299 Lakeshore Dr, Barrie, ON. L4N 7Y9 | Tel (705) 728-5832 | Cell (705) 791-6584 | Email: email@example.com
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