CMHC 40-year mortgage - good or bad for home owners?
By ebizniz on July 3, 2007 - 11:50am
An article by Vancouver Home Mortgage:
In addition to CMHC 40-year mortgage, Genworth Financial has a similar program for home buyers in Canada. Sky-high house prices are making home ownership less affordable to cash-strapped home buyers. Some economists and housing analysts are arguing that longer amortization is bad for home owners.
The danger in stretching a 25-year mortgage to the CMHC 40-year mortgage is that it will hurt home buyers who in the first place cannot afford to buy their own homes. The program is a two-edged sword. Yes, the lower monthly mortgage payment enable home owners in buying their homes, but it will also likely become a huge financial burden to the home owners. Generally, home ownership under this program will hurt rather than help these home owners.
Here are the reasons and adverse consequences of a CMHC 40-year mortgage:
1) By stretching a 25-year loan to 35 or 40 years, financially weak and cash-strapped home buyers are added to the pool of existing home buyers, causing further house price escalation.
2) A home owner buying a home for example at $342,500 with 10% down payment, has to pay $6,345 (2% mortgage insurance) on a traditional 25 year loan. But, he or she has to pay $8,248.50(2.6% as an extra 0.2% is to be paid for every 5 years over 25 years), $1.903.50 more on the insurance premium required for a 40-year loan.
3) At 6% interest rate on a CMHC 40-year mortgage, a home owner is paying $1774.25 compared with 25-year loan at $2.070.38 which is $296.13 lower. But, the big disadvantage is that the home owner is building equity at a snail's pace. Even after 10 years, the home equity accumulated by a home owner will be too little for moving up to buy a larger home.
4) The projected interest cost for the $342,500 25-year loan is $297,500, as compared with $526,148 for a CMHC 40-year mortgage. The extra mortgage interest paid for the 40 years loan is a staggering $228,628!
Some Canadian banks have a higher mortgage interest rate on a 35 or 40-year mortgage as compared with a traditional 25-year mortgage. That interest rate difference may negates some of the benefits of the lower monthly payment for the 35 or 40-year mortgage.
However, if a 35 or 40-year loan works for a home owner, he or she should be fully informed on the extra cost of interest payment for the longer term loan. If at all possible, a home owner should make use of the additional mortgage payment privileges to pay down his or her home mortgage as quickly as possible.
You are welcome to post your comments here, or subscribe to my weekly direct RSS feed.
The comments on your blog are very interesting and I would like to ask you a few questions in respect of them. First, what regulations are you referring to when you mention regulatory protections that are artificially propping up Vancouver house prices? Second, is there a more up-to-date method of following your suggestion of monitoring the supply/demand and price data for Vancouver than checking Realtylink? Currently, the latest data on Realtylink is for April, 2007 so I'm assuming it's usually about two months behind.
I sold my home a few years ago and have been actively looking for a new one the whole time (very discouraging process). I'm trying to decide whether it would be better just to put things on hold for awhile. Thanks for your help!
another struggling renter trying to buy a home.
correct me if i'm wrong, but if interest rates jump say 3% in the next year. would i not be better off waiting to buy a cheaper home, based on the fact that any homeowner paying 2800.00 a month who's mortgage has come to term and has been paying 4 % now has to pay 7%, the mortgage could now be 4000.00 or more. should i not wait for the inevitable foreclosure session to come before buying. what am i missing?
This is seriously stupid. I'm going to run out on a limb and guess that the average first time home buyer in Vancouver is about 30... so a 40 year mortgage. Okay, you're paying it off until you're SEVENTY.
Our government needs to find a way to moderate housing prices, not lock people in to spending their entire lives paying off their own shelter.
Keith said:
Please do not call people "stupid" it ia a sign of ignorance of the english languish, it preferable to say I disagree than to fire off loose lips.
We are investing in a home, or will be, for my disabled wife with arthritis and will be building a home I designed, I am a floor planner who designs homes for those who need to change designs that do not meet their requirements, so we know our limited business. We are/will investigate as long a carry-over mortgage as possible as we have monies set aside for our funeral expenses and grandchildrens schooling expenses, or some of. Our goal is to have as small as possible our monthly payments and will go 40 years if that is the best and there is no interest increase.
We want to leave as little monies extra than our will suggest for others and we will have as much left as possible for us to enjoy life.
As for insurance we will invest 1/3 of total costs that includes enough left-over mortgage for a small round poopl with eight foot width walk in steps and barbecued areas included in the rest of the 1/3 down payment on the mortgage.
There is much more but I am trying to tell you, explain, that a fourty year mortgage can be usefull. Please keep in mind that us stupid people can use things that maybe you cannot. Though I am not the one you called stupid, I wanted to explain that life is not the same for all of us and sometimes when calling people stupid maybe we need to first loook in the mirror.
Anyways, for me, let me know if I need to be corrected, a longer mortgage is what I want. I do not want to leave too much monies for the taxman or my enemies.
I am upset, for I see too many articles with people being rude to each other "it may be the web" but surely we can use a little discretion when we need to make a point.
Keith.
"On regulation constraints on supply"
1)BC's ALR(Agriculture Land Reserve Commission) is a provincial body that controls all agriculture lands in various lower mainland municipalities. In places like Richmond, Surrey and elsewhere, it is almost impossible to free up more agriculture lands for housing. The highest-and-best-use of land is not utilized as a result of this ALR regulation.
2)The building codes for Multi-family housing have many restrictions and requirements for concrete high-rise or 4 storey frame buildings. In other cities around the world, there are multi-family buildings of various heights. Along major transit routes, if 4 storey buildings are allowed to be increased to say 6 or 8, and changes to some building code restrictions, housing density can be increased. This will help to increase the supply of housing stocks and helps lower prices.
"On housing price trends" - There are a few housing blogs you can read. I follow the price charts by Brian Ripley. You can follow the link via my Vancouver Mortgage Blog
www.vancouver-home-mortgage.com/vancouver-blog.html and click the "Canadian R.E. Price Charts" link. If you follow the 6 cities charts and the 6-month moving average, you will notice that the price trend for each city is still up. Ottawa and Montreal prices are much lower, but of late they too are showing signs of going up.
We are here in the lower mainland of Vancouver, and we just have to accept Vancouver is the most expansive city in Canada. We may have to wait and see how house prices will turn out.
Thanks very much for this information. Please keep up the good work on your blogs - very informative and balanced!
I think we need to re-evaluate our lives and our society. Statements like Scotia Bank's "you're richer than you think" urk me, as do the 19% credit cards most people have. What is so horrible with saving your money? Does no one have this skill or more importantly, the required discipline? What's wrong with living within your means?
If you can't afford a house with anything other than a 35 or 40 year mortgage you have three real options:
Wait for a few years and save your money. You'll probably be making more by the end of those few years too.
Buy a less expensive house. If you can't afford the base price of the house, how will you afford repairs, or even the utilities? a bigger house means higher heating and lighting bills. How can you afford to furnish your dream house if you can barley make the minimum payments?
Perhaps the best, go back to school and get a higher paying job or renegotiate your salary.
Combine the three above steps and you're well on your way to a 25 year mortgage with a sizable down payment. I think it'll fall on deaf ears. The above requires effort and discipline. Two strong qualities that are ever more scarce in our society.
The answer is: Well it depends on your situation. If you must buy, and do not qualify for a 25 year mortgage, then the 40 year ammortization is right for you. One thing though, do you anticipate to pay for your house for the next 40 years? Do you plan to live in the same house for the next 40 years? You do know that the term would be 2, 3 or 5 years and after than you can go into a conventional mortgage if you qualify?
The article is a bit misleading. It paints everyone with the same brush, does not take into account the equity you would have gained due to increase in price. Say you don't qualify for a 25 year mortgage now and opt not to buy. 5 years later, you do qualify for the 25 year mortgage and the same house is on the market, at $100,000 above the price it was listed at 5 years ago. What if you had bought that house on a 40 year ammortization 5 years earlier? And now you switch to a 25 years ammortization - think of the equity you built up.
Post new comment