The 35-year mortgage — built to last a lifetime
REAL ESTATE
The 35-year mortgage — built to last a lifetime
PATRICK BRETHOUR
CALGARY — The 35-year mortgage has arrived in Canada, giving overstretched first-time buyers the chance to plunge into the heated real estate market — for the long term. But it might just mean that they end up making the last payment from their Canada Pension Plan cheques.
In Canada, the 25-year mortgage has been the standard maximum, but the rapid escalation of housing prices has now shattered that previously ironclad limit. Genworth Financial Canada said yesterday that it will start insuring 35-year and 30-year mortgages, trumping a move by larger rival Canada Mortgage and Housing Corp.
CMHC said three weeks ago that it would begin to insure 30-year terms. Both firms charge fees to insure low down-payment mortgages provided by financial institutions, but do not lend money directly.
Genworth said the mortgages are aimed at buyers who might find it tough to make payments needed to secure a home as real estate skyrockets. “It’s tied to rising prices,” said Peter Vukanovich, president and chief executive officer.
Despite the recent rise in interest rates, major urban centres are still seeing substantial increases, according to figures from the Canadian Real Estate Association. The average cost of resale housing jumped to $490,004 in Vancouver last month from $387,426 a year ago; Calgary’s average price soared to $304,560 from $244, 290; Toronto’s, $353,928 from $334,254.
Genworth is wooing first-time buyers. A basic profile: professionals, likely living in a major urban centre, and “younger in their careers,” says Mr. Vukanovich, who notes that age is not a factor in mortgage decisions.
Toronto-Dominion Bank economist Sébastien Lavoie said the new type of mortgage is yet more proof that the current housing boom is losing steam, as the mortgage industry tries to pump up the rapidly depleting pool of first-time buyers. “There’s no doubt the peak has passed,” Mr. Lavoie said. Earlier efforts to lure first-time buyers — including less restrictive policies on 5-per-cent down payments and lower insurance rates — have been remarkably successful in propping up housing demand, he said.
For consumers willing to sign up for a 35-year mortgage, the extra decade of indebtedness means that monthly payments drop sharply. In a traditional 25-year mortgage with a 6-per-cent interest rate, a home buyer would pay $1,919 a month on a $300,000 mortgage. With a 35-year term, the monthly payment drops to $1,695 — but the total amount paid over the life of the mortgage jumps by $136,387 to $712,213.
Mr. Vukanovich said consumers can trim that bill by making lump-sum payments, or boosting their regular payments over time.
But Fran Smith, executive director of the non-profit Credit Counselling Services of Alberta Ltd., said consumers should think carefully about why they are signing up for a 35-year mortgage before doing so. If a consumer is expecting household income to rise in coming years, such a loan makes sense, she said. Otherwise, it can strain a borrower’s budget, particularly if interest rates jump, or if the borrower has other significant debts.
Genworth’s announcement, which the company says was a year in the making, comes just three weeks after CMHC announced a pilot project for 30-year mortgages. In addition to regular insurance charges, CMHC levies a 0.25-per-cent surcharge for the longer term. Genworth has a lower surcharge, 0.2 per cent, for its insurance of a 30-year as well as the 35-year for a 0.4-per-cent surcharge.
Long-term commitment
For a $300,000 house at 6 per cent interest, a home owner who took out a 35-year mortgage would pay $136,387.80 more than a 25-year term.
25-year amortization
Total paid: $575,825.81
Interest: $275,825.81
35-year amortization
Total paid: $712,213.61
Interest: $412.213.61
SOURCE: GENWORTH FINANCIAL CANADA