Think carefully before increasing amortization
Wendy Mclellan
Province
Genevieve Gubbels is looking at a new option that could help her buy an affordable condo in Steveston. Photograph by : Nick Procaylo, The Province
Genevieve Gubbels would like to pay her own mortgage rather than someone else’s, but with one salary and the Lower Mainland’s crazy real-estate market, she’s struggling to hold on to her dream.
“I am feeling pressure to get into the market,” said Gubbels, a 29-year-old recreation therapist.
“I’m turning 30 next month and house prices keep rising — I know if I don’t get in now, I might not have a better time.”
Gubbels hopes to find an affordable condominium in Steveston and she has a roommate who will help with the mortgage payments. But it may not be enough to get her into her first home.
She is now considering a new option introduced this month in B.C. that will reduce her monthly payments by increasing the amortization period of her mortgage.
“I am certainly thinking about a 30-year mortgage,” Gubbels said.
“I don’t find myself in a financial situation to take on high mortgage payments. This is a way a lot of people in my situation can get into the market.
“I want to start moving up the housing ladder — I expect to be in my first place for less than five years then move up. I don’t want to be striving for my dream home my whole life. I want a good number of years to enjoy it.”
Canada‘s two mortgage insurers, CMHC and Genworth Financial, now offer lenders insurance for longer amortization mortgages. Genworth insures both 30- and 35-year mortgages, while Canada Mortgage and Housing Corporation offers 30 years.
Although most lenders don’t provide the longer amortization without insurance, Coast Capital Savings Credit Union offers uninsured 30- and 35-year mortgages, as do some other alternative lenders accessible mainly through mortgage brokers.
CMHC charges a premium of 0.25 per cent for the extended amortization on top of their usual mortgage insurance premium, while Genworth adds 0.20 per cent for every five years beyond the traditional 25-year period.
By increasing the amortization period, more first-time buyers such as Gubbels can get into the housing market. The new product may also be helpful for those who want the flexibility of better cash flow, but financial advisors encourage people to think carefully about their goals before signing up.
“It allows people to get into a housing market that is very strong,” said Judith Mewhort, managing partner of Montridge Financial Group Ltd. in Vancouver.
“The severe negative is the longer amortization means there is much more interest to pay over the life of the mortgage. You need to make extra payments if you’re going to reduce that interest cost.”
The longer amortization means a bigger portion of the monthly payments goes to interest in the early years so homeowners build up less equity in their property, she said.
“Unless there’s big upward movement in the market, or you’re making extra payments, you won’t have the equity to move up.”
Paula Siemens, a mortgage broker with Invis in Vancouver, said reducing the mortgage payment by even $100 a month with a longer amortization may be enough to help first-time buyers qualify under lender rules. In some cases, her clients pay more in rents than the mortgage payment, but don’t qualify.
And, if they set up biweekly payments, the amortization period automatically drops to 25 years or less. Mortgages can also be renegotiated to a shorter amortization on renewal, or with the next purchase, she said.
Rick Lunny, president of the Canadian division of GE Money Mortgages, said most people don’t stay in their first home forever and pay off one mortgage for 25 years.
GE Money moved into B.C. last month and offers the longer amortization mortgages through brokers.
“As house prices increase, people see this as a way to make homes more affordable,” Lunny said.
“For some, it may allow them to live closer to the city so they can reduce commuting costs. It may also work for young families where one partner is on maternity leave so their income is temporarily reduced.
“But you do have to manage your finances responsibly — if you stay in the same house and make payments over 30 or 35 years, you will pay considerably more interest.”
Carla and Dave Edge have just signed for a 30-year amortization to buy their new home even though they qualified for the payments over a 25-year period.
The Surrey family is moving from a townhouse to a three-acre property in Abbotsford where they keep their horses rather than boarding them elsewhere.
“The timing isn’t great, but this is our dream,” said Carla Edge, 36, who recently returned to university full time to pursue a degree in criminology.
“This will reduce our payments by $200 a month, and this is a big step up for us. The lower payment gives us a little bit of breathing space and in three years, I’ll be working again and we can reduce our amortization to 15 or 20 years.”
Greg Holden, a mortgage specialist with CIBC’s Home Loans Canada division, said lenders have offered 30-year amortization mortgages in the past — most recently in the 1980s when interest rates were skyrocketing — but they disappeared years ago.
“I haven’t recommended them because of the cost of borrowing,” Holden said. “But I may have to re-think that with the cost of housing. This may get people into the market and getting used to the cost of owning a home.
“I see it as a stop-gap measure to get a foot in the door.”
COMPUTING THE COSTS
Let’s do the mathematics on a $300,000 mortgage at six-per-cent interest.
– 20-year amortization:
Monthly payment: $2,136.57
Cost of borrowing: $212,774.60
– 25-year amortization:
Monthly payment: $1,919.42
Cost of borrowing: $275,825.81
– 30-year amortization:
Monthly payment: $1,784.47
Cost of borrowing: $342,409.49
– 35-year amortization:
Monthly payment: $1,695.76
Cost of borrowing: $412,213.61
© The Vancouver Province 2006