You’ve heard of passing your property on to your kids, but what about passing down property debt?
It’s a situation that could become increasingly common with the recent arrival of extra-long mortgage options that take 30, 35 or 40 years to pay off.
Traditionally, mortgages topped out at a maximum of 25 years, perhaps on the assumption that no sane person would want to pay the excessive amounts of interest a longer mortgage would entail. Mortgages that run up to 40 years were introduced in the past few years by lenders hoping to rake in profits by making home buying attainable for a greater number of people in today’s tough market. Longer mortgage terms mean lower monthly payments but more interest paid in the long run.
Elsie Tse, a mortgage broker working for the Mortgage Alliance in Vancouver’s sky-high real-estate market, says the advent of extra-long mortgages is no surprise given the rising cost of buying a home.
“Because prices are getting higher and higher, not many people can afford to buy a home. That’s why banks came up with these 35- and even 40-year mortgages — to help people buy a house they might not be able to buy otherwise,” Tse said.
But Tse advises people to reconsider buying a home if the only way they can afford it would be to take out a mortgage on a term longer than 25 years. By her calculations, paying off a 40-year mortgage can increase the interest you pay by almost 60 per cent of the original mortgage amount compared to a 25-year mortgage.
Jim Murphy, president and CEO of the Canadian Association of Accredited Mortgage Professionals, says for better or worse, extended mortgages are here to stay — in 2007 alone, 37 per cent of all new mortgages in Canada were for periods longer than 25 years, a staggering statistic when you consider that just a few years prior few such mortgages were available at all.
“Homebuyers are saying we want these longer amortizations because we want to get into the market quicker. It’s very much related to affordability,” Murphy said.
Murphy recommends getting educated before buying.
“Do your research and ask lots of questions to be comfortable with your choices,” he said.