Should you chose a longer amortization plan? It depends on your situation. Here are the pros and cons of taking a longer amortization:
Pros
1) You could purchase a more expensive home. For example, a couple earning $80,000 would normally be allowed to purchase a home worth $320,000 with a 25 year amortization plan. This same couple could qualify to purchase a home worth $380,000 on a 40 year amortization plan.
2) You could lower your payments by spreading your payments over a longer period. For example, payments on a $300,000 mortgage is $1,745 per month (@5% interest) using a 25 year amortization. With a 40 year amortization, your payments drop to $1,436 per month. The lower payments can make it much easier on your budget
3) When you are able to afford the higher payments, you can always shorten he amortization by increasing your monthly payments or making extra payments
Cons
1) You don't get to pay down your mortgage quickly
High Ratio (when you have less than 25% of the purchase price for a down payment)
In a major policy announcement, the Canadian Housing and Mortgage Corporation (CMHC) and Genworth Financial announced that they will accept applications with amortizations up to 40 years. The mortgage insurance fee is increased by 0.2% for every 5 years that is added to the amortization.
Despite this announcement, only a few lenders and banks have implemented these extended amortization programmes. Many lenders / banks are of the opinion that these products are bad for customers (or at least, that is the official line). In our opinion, it is better to give our customers the option.
Conventional Mortgages (when you have at least 25% down)
At the time of writing, only two major lenders have announced that they will be offering extended amortizations for conventional mortgages. These are MCAP, Scotia and Firstline. Since lender policies change often, please visit this website for updates on this programme.
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