Thank Flaherty it’s (almost) Friday!

On Friday March 18, homebuyers will no longer have a 35 years to payback their mortgage. That’s a good thing.



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If you’re a first-time homebuyer, or a homeowner looking to leverage your single-largest investment, you’re probably a bit perturbed with the new financing rules imposed by Finance Minister Jim Flaherty.

According to these new rules, after March 18, the longest payback period you can qualify for is 30 years, down from 35. This new rule will result in higher regular payments and will impact at least 20,000 resale home sales in 2011, according to experts. That’s because up until now, a whopping 30% of homebuyers have opted for 35-year amortization schedules.

While changes like these are always met with criticism, with many first time home buyers concerned about their ability to jump into the housing market, the question remains is this a good thing? Is Minister Flaherty helping or hurting first time homebuyers?

Helping. And I’ll tell you why.

If you had 5% as a down payment, and you’re gross family income was around $65,000—the median salary, in Canada, is $63,900—you could afford a $341,000 home. (We assume a 25-year amortization, for a fixed-rate 5-year term. These are the same assumptions the banks use for pre-approved mortgage applications. At time of writing, the posted rate for a 5-year fixed was 3.8%).

But bump the payback period up to 30 year and your maximum house price jumps to $379,000. Add another five years to your payment schedule and you can afford a $410,000 home (excluding closing costs and mortgage insurance fees).

Great news, until you realize how much increasing your payment schedule really costs you. (I assume a 5% down payment on the maximum house price you can afford and that the interest rate remains constant for the length of the loan):

•    $184,000 in interest payments for a $341,000 home (25 year amortization)—or 54% of your home’s current value
•    $251,000 in interest payments for a $379,000 home (30 year amortization)—66% of your home’s current value
•    $324,000 in interest payments for a $410,000 home (35 year amortization)—79% of your home’s current value

Sobering stats—to say the least.

While I’m the first to acknowledge the benefits of home ownership, and real estate investments, in general, I don’t think the emotional pull to own a home—particularly your dream home—should trump sound investment acumen. And I just can’t rationalize paying an 80% premium on any investment as a sound investment strategy.

35 comments on “Thank Flaherty it’s (almost) Friday!

  1. Apparently, among first-time buyers, 35-year mortgages are (were?) exceedingly common — the vast majority of them were doing 5%-down, 35-year amortizations.


  2. Excellent! Love the breakdown. I assume monthly payments, too? @Noel: click on the RSS logo


  3. Very few first-time homebuyers will stay in the same home for anywhere near 30 years. They'll move up at least once or twice over that period of time and terms, rates and amortizations will change every time , along with equity. The extended amortization allowed young people to get into the market in the first place, particularly in high-priced markets such as Vancouver. The mortgage payment they would have had prior to March 18th will increase thereafter, and quite significanly for most first-time buyers.


  4. Bullshit. With shorter amortization period, home owner has to pay more per month, thus reducing his cash flow and adding more financial pressure every month. With an open mortgage, home owner can pay down more money when they have it, like savings from reduced payments every month provided with a longer period. Longer period provides more flexibility in financial.


  5. Excellent article!! More of these need to be done to show the real numbers that many havent or dont want to look at. The numbers are realistic if as the article states, the loan lasts the full term and the interest rate stays about the same (or goes up). Many who dont do these numbers go in in with rose coloured glasses based on biased advice and or hearing too many overinflated profit stories (was the real math done in these as well with all costs added in for the full term?) I agree the numbers would change IF one could afford to pay extra on the mortgage especially in the first five years when pyts are very weighted towards interest but too many who buy homes with little down wind up in a situation with little extra in their pockets to do this.


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