November 14, 2011
Canadians are taking on more debts and for longer lengths
CANADIANS ARE TAKING ON MORE DEBT AND CARRYING IT LONGER
Amortization is the length of time it takes you to pay off your entire mortgage debt. Since mortgage loans are usually large sums of money, the time it takes the average person to pay off the debt takes a number of years. At the initial mortgage signing, the borrower will need to set out how many years they wish to carry their debt (assuming they qualify for those years). Typical amortization lengths range from 20-30 years, however, with the advent of the CAAMP Annual Report, some interesting new mortgage trends were brought to light, especially regarding how amortization lengths have been changing over the past few decades.
Canadians are taking on more debt and for much longer. And they’re doing it through their mortgages. Currently, 22% of mortgages in Canada have amortization periods of 25 years or more, up from 16% three years ago. And that number is sitting at 38% for newly-purchased homes in 2011. There is one factor which may have pushed this number to rise sharply this year and that is the new Canadian mortgage rules that took effect earlier in 2011. One of the changes reduced the maximum amortization period of CMHC insured mortgages from 35 years to 30. This pushed potential home buyers who were on the fence about buying a home into home ownership; for fear that they wouldn’t qualify under the new rules.
Even though there was a large increase in the percentage of home owners with longer amortization periods (over 25 years) this year, the trend had actually been happening over the last five years. Take a look at the chart below:
|Time Frame||Mortgage up to 25 years amortization||Mortgage over 25 years amortization|
|Prior to 1990s||96%||4%|
As recent as of 2005, 92% of mortgage owners had 0-25 years of amortization on their mortgage. Today, that number sits at 59% which represents a staggering a number closer to half the population of mortgage owners versus near majority only a few years earlier.
This reveals is that Canadians are comfortable taking on more debt for more years (through their mortgage). This was partially confirmed by a poll conducted by RBC. Almost half of those who responded said they were comfortable with their personal debt level. Adding years to your mortgage vastly increases the total amount of interest you pay over the life of your mortgage. This adds up to tens of thousands of dollars.
Let’s use the Ratehub mortgage calculator to determine the interest over the life of various amortization periods. Assuming a house value of $350,000 with a 20% down payment and a 5-year fixed rate at 3.19%
|Amortization period||Total interest|
From the data collected above, we are able to break it down in the following:
|Adding additional years of amortization||Difference|
With all things being equal less the amortization period, we can see that an increase of 15 years translates into $85,348 of extra interest payments!
What can explain this new shift in thought?
The CAAMP survey showed that few Canadians regret “taking on the size of the mortgage they did”. It was also revealed that the popular opinion is that mortgage debt is considered good debt and that real estate is a good long-term investment. The average Canadian needs to realize that a property you occupy is primarily an asset, not an investment. The more you owe to your mortgage debt, the less you have in home equity. Longer amortization periods retard your ability to gain equity in your home (because of the smaller payments to the principal).
Canadians carrying debt-load has shifted from the exception to the norm. And mortgage debt in particular can be considerably difficult to ‘see’, because the borrower needs to forecast to understand what they actually owe. Unlike credit card statements or student loans, lending institutions do not broadcast the total debt remaining or even what the borrower owes in principal vs interest. It is up to the borrower to stay active with their mortgage finances. To ensure you avoid paying big $$$ in interest, pay attention to the amortization schedule, not just what the monthly statements look like.
This article was provided by RateHub.ca, an independent, impartial mortgage rate comparison platform. We bring the most competitive mortgage rates to one place, so you can make informed and efficient decisions. We believe that finding the best mortgage rate should be straight-forward, and our website has been designed with that in mind. RateHub works with the top mortgage brokers and lenders in Canada to bring you the most competitive mortgage rates. We update our rates on a daily basis with accurate, real-time data. We also provide ongoing mortgage education and resources to assist you in your selection process.