To help households access property ownership, Justin Trudeau’s government is extending the maximum amortization of mortgage loans by five years, to 30 years, instead of 25 years.
But with the median price of single-family homes in Quebec at $443,000 and that of condominiums at $375,000, is it a good idea?
What is the difference between a $400,000 mortgage amortized over 30 years versus a 25-year amortization? For a mortgage loan with an average interest rate of 5%, this reduces the monthly payment by about $191, from $2,326 to $2,135.
So we’re talking about a reduction in monthly payments of 8%, or $2,292 per year. At first glance, this is very attractive.
But beware! Don’t be fooled. There is a huge cost to this five-year amortization extension. In fact, reducing your monthly mortgage payments will result in an additional interest bill of $70,589.
At the end of the 30 years, the $400,000 property will have cost $368,515 in interest charges, compared to $297,926 in interest charges if the loan had been amortized over 25 years.
Relevant or not?
Since August 1, first-time buyers of new properties can amortize their mortgage over 30 years instead of the traditional maximum amortization period of 25 years. And as of December 15, they will also be able to amortize their mortgage over 30 years if they acquire an existing property. In addition, all buyers of new properties will also have access to a 30-year mortgage amortization.
Is this extension of mortgage amortization from 25 to 30 years that Justin Trudeau’s government announced in Minister Chrystia Freeland’s last budget in order to help Canadian households access property ownership relevant?
Yes for banks
For mortgage lenders, such as the major Canadian banks and Desjardins, this is indeed a very good deal because of the increased interest charges they will collect on mortgage loans.
In addition, since these will be mortgage loans where down payments are less than 20%, these loans are necessarily insured by CMHC or other insurers (Sagen or Canada Guaranty Mortgage Insurance Corporation). This insurance protects financial institutions and not borrowers. Consequently, banking institutions do not run any risk, in addition to making a loan by taking the property as collateral. Thus, in the event of default, the bank will recover its money.
Not safe for borrowers
For borrowers who opt for the 30-year amortization extension, the advantages are somewhat less obvious.
Yes, they are getting access to property, but at an exorbitant price, particularly due to the increase in mortgage interest charges.
When it comes to mortgage insurance, it is the borrower who pays the bill. On a $400,000 loan, mortgage insurance, in the case of a down payment of only 5%, will cost him $15,385.
Becoming a homeowner inevitably involves its share of annual expenses that you don’t have to deal with when you’re a tenant. For a $400,000 property, I’m referring here to property and school taxes ($4,300); home insurance ($1,200); electricity, heating, maintenance ($4,000).
The added value
Buying a property has proven to be quite profitable in recent years as prices have risen sharply. But over the long term, say since 2003, or 21 years, the increase has been quite moderate.
Based on the median prices collected by the APCIQ (real estate brokers), I calculated that the price of single-family homes has increased at an annualized rate of 6% since 2003, compared to 5.3% for condominiums and 5.8% for plexes with two to five units.
That’s all well and good. But the tenant who had invested in the Canadian Stock Exchange (iShares XIC) the difference between the cost of his rent and the payment of a mortgage would have seen his portfolio appreciate at an annualized rate of just over 7%.
That said, for first-time buyers, the real question to ask is: do I have the financial capacity to pay all the expenses generated by the acquisition of the property, without feeling financially burdened?