Friday, January 11, 2008

The 40-year mortgage

Longer amortization is becoming more popular in Canada. Here is what RBC had to say about longer term mortgages.
Longer amortization mortgage products are a large and growing share of monthly mortgage originations, particularly in the high ratio mortgage segment. This development has unfolded within the past year and a half as the market has gone from standard 25-year options towards 30-, 35- and 40-year mortgages.
With a 40-year mortgage the amount of equity built through payments is very low. With a $300,000 loan at 6.25% it works out to about $3,600 after 2 years. Probably less than property taxes an owner would have to pay. Also combined with a high ratio mortgage it takes YEARS to pay off the insurance using a 40-year mortgage. With $30,000 down the CMHC insurance is $7,800 for a 40-year and $6,000 for a 25-year.

Not building equity too quickly paying mortgage insurance for 4 years.

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