Allowing 30-year mortgage amortization may affect few Edmonton buyers

Lower monthly payments may not be attractive unless mortgage allows for lump sum payments to offset the larger amount of interest.

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Stretching a mortgage’s amortization is unlikely to have much impact in the Edmonton market, with the reduction in monthly payments much less than in pricier markets, a new study shows.

“I don’t see a lot of clients who are going with a 30-year amortization, and it’s really because they’re not saving that much money on monthly payments,” says Krystal Smith, a realtor with Exp Realty. The Edmonton realtor is commenting on a recent Zoocasa Inc. report comparing monthly payments for 25-year and 30-year amortizations in 19 Canadian cities.

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The study by the national realty firm examined monthly payments and total interest costs based on benchmark prices for each city, using a 4.79 per cent interest five-year, fixed-rate mortgage and a 20 per cent down payment.

In Edmonton, where the benchmark price in March was $385,900, the monthly mortgage payment with a 25-year amortization was $2,199 versus $2,011 for a 30-year amortization.

That $188 difference in cost is unlikely to push Edmonton buyers to go with a longer amortization, Smith notes.

“You see it more in more expensive markets because then there is a bigger gap between 25- and 30-year amortizations in the payments.”

In Vancouver, for example, the study found the monthly payment with a 25-year amortization for the benchmark home price of $1,196,800 is $6,818. That’s compared to $6,238 a month for a 30-year mortgage, or $580 less.

Yet the long-term interest costs associated with 30-year amortizations — which are more common among existing homeowners renewing and refinancing — are substantial, says Edmonton mortgage broker Collin Bruce with Dominion Lending Centres.

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“Often with 30-year amortizations, we’re seeing clients who are comfortable with a 25-year amortization, but they choose a 30-year because the lender will allow them to make lump-sum payments without penalty on the principal,” he says.

“So by making those additional payments, they shorten amortization, but they also have the ability to make lower monthly payments with the 30-year amortization if they run into financial challenges.”

Having an accelerated payment plan is important because the long-term interest costs associated with a 30-year amortization versus a 25-year and 30-year mortgage are impactful, he adds.

In Edmonton, the interest cost over 30 years would be $338,198, $64,547 more than interest charges for a 25-year period.

In Vancouver, the interest charges over a 30-year amortization is $1,048,861, or $200,180 more than a 25-year amortization.

What’s more, the 30-year mortgage has generally been limited to buyers with 20 per cent or more for a downpayment, Bruce says.

“We don’t see many first-time homebuyers with 20 per cent down so this is often seen more with refinancing, to roll unsecured debt into the mortgage, for example.”

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Thirty-year amortizations, however, are more popular with investors because it lowers monthly payments — helpful when a property is vacant for short periods. As well, investors can deduct the interest costs against taxes owing on the income from the property, he adds. The new federal budget announcement, however, will soon allow first-time buyers to use 30-year amortizations, but it will be narrow in scope, only available for new home purchases.

“I was really excited about the announcement until I saw the details and realized it probably won’t help as many buyers as I had thought,” says Smith, about the amortization extension change that will commence in August.

“So I don’t think it will make as much of an impact.”

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