Deciding to take out a 40-year mortgage is a massive choice that requires careful consideration. Many Canadians opt for this type of mortgage because of the lower monthly payments that come with an extended repayment period.
But the long-term costs of an extended mortgage are not to be underestimated. They are short-term solutions to cash flow issues, not a way to get a house that you couldn’t afford with a 25-year mortgage.
Recent statistics show that an increasing number of Canadian homeowners are choosing longer amortization periods. A staggering 33.3 per cent of Canadian mortgage holders have amortization periods that exceed 30 years. This trend has raised concerns among real estate regulators who fear the potential risks associated with these long mortgage periods.
In some cases, homeowners can extend the initial 25-year amortization period by making a larger down payment (must be over 20 per cent down). Banks may also offer exceptions for certain customers during renewals if the borrower is having short-term cash flow issues.
Significant hikes in their monthly payments
While extending the payment period may provide temporary financial relief, it can have devastating long-term consequences. Homeowners who have to revert to their original amortization period when renewing their mortgage may face a significant hike in their monthly payments. This puts their homes at risk of legal problems and can be emotionally devastating if they lose their home.
Taking out a 40-year mortgage could cost a homeowner up to hundreds of thousands of dollars more than a 25-year mortgage in interest alone. The longer the mortgage term, the higher the interest rates, and the greater the total cost of the loan.
Canadian homeowners must consider the implications of their decision carefully. The allure of a variable-rate mortgage with a longer amortization period can be tempting for homeowners struggling to make ends meet.
But the decision to extend the repayment period should not be taken lightly. It's crucial to consider the long-term implications and seek alternative solutions to address financial challenges. For example, at the end of the day, it might be better to sell your home and move to somewhere more affordable.
Reaching your mortgage trigger rate
When the mortgage reaches the trigger rate, and the repayment period is extended, the majority of the payment goes toward interest, leaving only a small portion to reduce the principal balance. At the end of the mortgage term, the principal amount owed barely changes. This can keep Canadians in poverty, being a slave to the bank.
Worse still, in some cases, the monthly payments don't even cover the interest, leading to a growing loan balance. The financial burden can be overwhelming and emotionally taxing, leading to foreclosure and the loss of the home.
One potential solution to reduce the risk is to require lenders to ensure that homeowners revert to their original contractual amortization obligations upon renewal. But this doesn't address the underlying financial issues that led to the decision to extend the amortization period in the first place.
Extending the amortization period from 25 to 40 years can increase the total cost of the mortgage by up to 70 per cent.
Short-term relief for homeowners
Jova Xu, a Realtor with Jovi Realty suggests that banks are often willing to work with clients who are struggling to make payments and avoid foreclosing on their properties. Extending the amortization period is a popular solution that has prevented a wave of forced sales in the housing market, providing some short-term relief for homeowners and the Canadian real estate market.
Over 25 per cent of Canadian homeowners have variable-rate mortgages. Don’t wait until it’s too late, take action now to protect your home. If you can’t afford it, sell it and buy something else. Don’t be a slave to your mortgage.
Alistair Vigier is the founder of a website that has transformed the way people find lawyers across Canada. Vigier's vision for ClearwayLaw was born out of a personal experience that he had with a legal issue, which made him realize how daunting it can be to find the right legal representation.