Don’t Pay Until 2047 | What a Great Deal
But What is the Cost?
Do not pay until 2047. It has a nice ring to it for Canadians who are committed to home ownership but unable to afford the price tag that comes with buying property. No wonder with the price of houses in the Vancouver market. The reality is the level of speculation in the market has impacted home buyers significantly.
Add up the development fees required by the municipalities, transfer fee grabs by the provincial government and the GST for the feds, it is no wonder there is no money for a down payment and even less cash to make monthly payments? If the Canadian real estate industry hadn’t introduced the 40 year amortization the robust BC economy that is based on residential construction would come to a screeching halt.
Instead of planning to pay off their mortgage in 25 years, Canadians are now turning to products that give them longer to pay their debt. The downside of this equation is the larger interest payments over the course of a loan. If you consider the difference in payments based upon conventional loan ratios most of the buyers in the lower mainland couldn’t qualify for their mortgages.
Benjamin Tal, a senior economist with CIBC World Markets, says the change in the way Canadians pay off their mortgage is the most significant innovation to hit the industry in almost three decades.
"This has happened in just the past 16 months," says Mr. Tal, who doesn't believe the changes are necessarily bad for consumers or the housing sector.
In addition to lengthening the amortization period, the Canadian market has also been recently introduced to interest-only loans and zero-equity mortgages. Consumers can effectively borrow 103% of the value of their home because borrowers tack the cost of mortgage insurance on to the total loan value. Zero equity loans will become a larger part of the market if the industry wants to keep the industry booming. With the significant increase in housing prices a house in 2005 required a $20,000 down payment now requires a $30,000 down payment not including the closing costs.
What is amazing about the shift towards paying off your mortgage way ahead in the future is that it has occurred almost overnight, even though this is not the first time banks have tried to attract consumers with longer amortization periods. The key difference is the debt loads that most consumers carry. It is almost a requirement to carry debt to purchase a vehicle buy a home etc.
The attitude toward debt is totally different now. The CIBC study shows a "significant" amount of new money is geared toward that 2047 mortgage-burning party.
Those extra 15 years of mortgage debt will cost Canadians. The Canadian Real Estate Association says the average sale price of a home was $311,495 in July. If you bought that house with 0% down and a 25-year amortization, the total interest would end up being $277,993 over 25 years, based on monthly payments and an interest rate of 5.85%, a typical discounted rate today. Extend the amortization period 40 years under the same terms and you end up paying $488,116 in interest --more than the price of the house.
That’s a lot of interest, however if you don’t invest in a house you will lose out on the largest capital “tax free” gain available to most Canadians. We can’t turn back the clock. To do so would wipe out the wealth of most Canadians.
The role of the mortgage broker in BC is to outline the pitfalls that clients can avoid and in the process live happier and more prosperous lives.
Duncan Seward
A Mortgage Broker in BC
604-644-0826
This site is under copyright by the bcmortgageactioncenter.com. We respect the privacy of our clients. We are licensed home mortgage brokers. This site is the property of www.duncanseward.com. If you wish to contact the web master he can be reached at 604-644-0826.