Are extended mortgages a good idea?

For most Canadians, home ownership is as much about financial well being as it is about comfort, security and a sense of pride. Building equity in your own home, while enjoying the experience of being a homeowner, is a priority for millions of Canadians. And now there are more options available to help realize the dream of home ownership. It’s best for buyers to start by understanding their current financial situation.
 
New mortgage products, such as extended amortizations, can help make the transition to home ownership. In addition to the traditional 25-year mortgage amortization (the time you’ll take to pay the loan back in full, with interest), there are now 30-, 35- and 40-year amortizations available.
 
Extended amortization products can help buyers with good credit become homeowners sooner, but they’re not without some drawbacks.
 
A home purchased with a 40-year amortization mortgage will carry significantly higher interest costs over the life of the mortgage than one purchased with a 25-year mortgage, assuming you use the entire amortization period to repay the loan. For example a $250,000 mortgage at 6.5 per cent with monthly payments paid over 40-years will cost $445,177 in interest. If that amortization were 25 years, the consumer would pay $252,368 in interest, a savings of $192,809.
 
Extended amortization products should be viewed as a tool to help you become a homeowner sooner. However, there are options available for paying down mortgage debt more quickly than the original amortization period chosen.  For example, mortgage loans in Canada generally end after five years, after which time you have the option of choosing a shorter amortization period.
  By doing so, you’d save interest charges and eliminate your mortgage sooner.  Similarly, the average Canadian moves every seven years, which ends their mortgage and provides an opportunity to choose a shorter amortization period.
 
Also consider that mortgages in Canada offer pre-payment allowances of between 15 per cent to 20 per cent of the original mortgaged amount, usually on an annual basis. Some consumers use their income tax refund from RRSP contributions for this purpose.
 
Accelerated payment options are another great tool to reduce mortgage debt. For example, a 40-year amortization period can be cut to about 32 years by moving from a monthly to accelerated bi-weekly payment schedule. If you make additional payments or double-up your mortgage payment throughout the year, you can also significantly reduce the number of years to pay off your mortgage.
 
Most Canadians (78 per cent according to a recent survey) are interested in paying their mortgage off as quickly as possible, and using the above strategies will allow you to do just that.
So, if a 40-year amortization is more expensive in the long-term, why choose it at all? Besides lower mortgage payments, there are other reasons why these products may make sense.
 
For example, you may purchase a ‘fixer upper’ and keep the extra cash flow available for renovation costs. Once the home is renovated, you can make accelerated payments or choose a 25-year amortization when renewing your mortgage term.
 
Similarly, for young professionals who still have student loans to consider, a 40-year amortization may make initial sense. It will allow them to pay down those loans and later pay their mortgage more aggressively after their income level rises and they’re free of that debt.