Taking care of your interest Daryl French - AMP Feb 21, 2011 - 2:54:18 PM RSS?

There has been a lot said and written recently with regards to the announcement about the up coming changes to lending guidelines brought forward by the Minister of Finance.   One of the main points of contention is the reduction in the maximum amortization from 35 years to 30 years.   Recently I happened to find an article I wrote back in July of 2007 announcing the pilot program CMHC was launching that would increase the maximum amortization from 25 years to 30 years.   Since then the amortization was bumped up to a whopping 40 years, and then last year reduced back to 35 years and now cut back to 30 years.   So I have to ask myself, is it really a big deal?

Well, we survived for decades with the 25 year limit and it did not bring the world to an end, so I don’t see it causing earth shattering changes moving forward.   Those that support the longer amortizations argue that it increases your buying power and allows more people to get into the housing market sooner or for those already in the market to be able to upgrade sooner.   All good points but let’s look at the numbers.

                                         Option 1            Option 2            Option 3

      Mortgage                     $100,000            $100,000            $110,620         

      Amortization                  25 years             30 years            30 years

      Term                            5 years               5 years              5 years

      Monthly Payment           $526.02               $475.52            $526.02

Based on these numbers I would agree with the previous arguments, changing the amortization from 25 to 30 years lowers your monthly payment by $50.50 or increases your buying power by just over $10,000.   But one key point is being over looked, what does this magical $50.50 savings per month really cost the consumer?

Based on the same data as used above and comparing the interest costs over 25 years (to compare apples to apples) in Option 1 the consumer pays $57,804 in interest and in Option 2 the consumer would pay $68,409 in interest.   So for this $50.50 savings every month the consumer is going to pay over $10,000 more in interest over the 25 year period.   But hold on, it gets worse!  In Option 2 after 25 years you still owe almost $26,000 on your mortgage which in Option 1 is paid off and you are mortgage free.

But is there is a solution; take the 30 year amortization and payoff a little extra every year from your tax return and you have the best of both worlds?   Not so fast… fact is less than 4% of people actually put down extra money towards their mortgage so I’m sorry but this theory is definitely busted for the average consumer!

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