Do not pay until 2047. The Canadian real estate industry has come up with the perfect product -- the 40-year amortization.
Instead of planning to pay off their mortgage in 25 years, Canadians are now turning to products that give them at least an extra decade to pay their debt -- subject to massive interest payments over the course of a loan.
Benjamin Tal, a senior economist with CIBC World Markets, says the change in the way Canadians pay off their mortgage is the most significant innovation to hit the industry in almost three decades.
In addition to lengthening the amortization period, the Canadian market has also been recently introduced to interest-only loans and zero-equity mortgages. Consumers can effectively borrow 103% of the value of their home because borrowers tack the cost of mortgage insurance on to the total loan value.
Mr. Tal, who is the process of compiling a report on how the new products have changed the market, says interest-only and zero-equity loans are probably less than 1% of new business. It's the long-term amortization that has caught everybody's fancy.
What he finds amazing about the shift towards paying off your mortgage way ahead in the future is that it has occurred almost overnight, even though this is not the first time banks have tried to attract consumers with longer amortization periods.
"They were available in the early '80s and nobody was interested. The attitude toward debt is totally different now," says Mr. Tal, who adds his study will show a "significant" amount of new money is geared toward that 2047 mortgage-burning party.
Those extra 15 years of mortgage debt will cost Canadians. The Canadian Real Estate Association says the average sale price of a home was $311,495 in July. If you bought that house with 0% down and a 25-year amortization, the total interest would end up being $277,993 over 25 years, based on monthly payments and an interest rate of 5.85%, a typical discounted rate today. Extend the amortization period 40 years under the same terms and you end up paying $488,116 in interest --more than the price of the house.
Paying that much interest is just throwing money away, says Ron Cirotto, who runs the Web site www.amortization.com. He has spent years trying to convince Canadians to pay down their mortgages and can't wrap his mind around the new amortizations.
He laughs at the suggestion the 40-year amortization is giving Canadians more flexibility when it comes to making lower monthly payments. "I'm not sure you can call it an advantage to pay interest for another 15 years," says Mr. Cirotto. "To me it's bullshit. The best way to save money is not to have any mortgage."
Have your own opinion on 40-year amortization mortgage? Call Alex Malkhassiants at (416) 723-9383 or go here - http://www.torontogreathomes.com/
canada.com
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