Insuring Thirty Year Mortgages

In late February 2006, Canada Mortgage and Housing Corporation (CMHC)announced that they will be offering to insure 30-year mortgages – a significant shift from the usual 25-year limit for most Canadians. What
was planned as a four-month pilot was so successful, that in late June, CMHC rolled out plans to make this feature ongoing. Plus, it introduced extended mortgage amortization periods of up to 35 years.

What does it all mean? It means lower monthly payments and better cash flow for Canadian homebuyers.

Amortization periods – the length of time calculated to pay off the entire mortgage – are a significant factor in the size of the monthly payments. The extra five years or ten years to pay off a mortgage can make a significant difference to the household cash flow of Canadians who are trying to manage a mortgage.

Let’s say that a young couple looking for their first home can manage only $1100 to spend on a monthly payment. They’ve found a home they love, but it’s going to require a $190,000 mortgage. They’re just starting out in their jobs, and they know they shouldn’t exceed their budget. But with interest rates at about 6%, and an amortization of 25 years, their monthly payments will be almost $1216: a figure that’s likely to place an uncomfortable crunch on cash flow and place the home out of reach.

But if they extend their amortization out to 35 years, the monthly payments drop to about $1084: well within their budget.

The longer amortizations, of course, come at a cost, although the 30-year amortization premium surcharge is under a quarter per cent. (The premium surcharge for the 35-year amortization is a little higher, at .40 per
cent). And, of course, the homebuyers may pay more for the house in the long run. But many homebuyers have the ability to increase payments and shorten their amortization at a later date. For many Canadians, the real problem is those first few years as they are getting their financial feet under them.

CMHC recognized that those monthly payments are a key obstacle in affordability, and the longer amortizations are designed to address that problem. Lower monthly payments mean a better chance at owning a home, better cashflow if you’re struggling month-to-month, or more house for your monthly payment. The longer amortizations are not for everyone.

But if you’re in the market for a high-ratio mortgage, with an extended term, you’ll want to get in to see an independent broker soon, and review your options. As a mortgage broker, I’m pleased that this new option
opens the door to more Canadians who are working hard to achieve home ownership. I have to say, too, that it has been a long time since we’ve seen such an excellent set of borrowing conditions for aspiring
homeowners. With downpayments as low as five percent, amortizations as long as 35 years, and rates still very low, home ownership may finally be within
reach for many.