Actualis



September 2006
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A lifelong mortgage?

Having conquered the U.S. market, 35-year and even 40-year mortgages have started to appear in Canada. Creative solution or false economy?


Until recently, mortgages amortized over 25 years were the norm for first-time home buyers. Not any more. Many financial institutions now allow payments to be spread out over 35 or 40 years. In July, the Canada Mortgage and Housing Corporation (CMHC) started insuring 35-year mortgages for buyers who can’t manage a 25% down payment.

Critics have been quick to weigh in: while a longer amortization period means lower monthly payments, it also means that the buyer will be paying interest for much longer. As we can see from the table below, the total amount of interest paid skyrockets as the amortization period increases.

Cost of a $200,000 mortgage at
6.5% fixed interest
Amortization Total repayment
Total interest
15 years $312,000 $112,000
25 years $355,000 $155,000
30 years $451,000 $251,000
35 years $502,000 $302,000
40 years $556,000 $356,000


Making home-ownership easier
What we are seeing is the not-so-hot side of a hot real estate market: prices have risen so high that it’s very tough for first-time buyers to get into the market. Governments and financial institutions have introduced a number of measures over the years – the latest being the 35-40 year mortgage – to ease this problem:

  • financing part of the purchase with retirement savings;
  • buying a house with as little as 5%, or even nothing, down;
  • paying just the interest for a specified period (usually the first 10 years).

A solution for starters?
Some observers comment that these measures allow young buyers to keep monthly payments more affordable for a few years, even if it means stepping them up later, when their finances can handle it. But even so, the wisdom of this strategy is debatable. After just 10 years, the mortgage above, amortized over 35 years, will have cost our young buyers about $7,000 more than if they had chosen the 25-year mortgage. Worse still, their net worth will have grown much more slowly: if they had gone for the shorter mortgage, they’d be $25,000 richer.

In a red-hot real estate market, this strategy of “pay the interest today, because you can cash in big tomorrow” might be justifiable. But it becomes much less so once a market begins to cool. Home ownership, sure – but at what cost?



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