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A Mortgage is Forever

September 20th, 2006 · 9 Comments

The astounding rise in prices of residential real estate, especially in Western markets has coincided with the introduction of interest-only mortgages (no principal payment for an introductory period) and mortgages with long amortizations of 30 and 35 years. Today’s Financial Post carried a story on how eroding housing affordability is making these mortgage products popular.

Just for fun, let’s compare a $250,000 mortgage with a 6% interest rate under three different amortization scenarios: 15 years, 25 years and 35 years. The monthly mortgage payment works out to $2,100, $1,600 and $1,413 respectively. However, the total interest paid is $128,000 for a 15-year mortgage, $230,000 for a 25-year mortgage and a stunning $344,000 for the 35-year mortgage (all of it in after-tax dollars as mortgage debt is not deductible in Canada).

It almost seems quaint now but not so long ago, a young couple would scrimp and save for a down payment on a house and slowly build equity in their home by paying down the mortgage. These days though, as Harper’s Magazine notes in a recent issue, “a growing number of workers [are] locked in to a lifetime of debt service that absorbs every spare penny”.

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9 responses so far ↓

  • 1 0xcc // Sep 21, 2006 at 8:02 am

    I saw a 50 year mortgage promoted in an ad on TV a couple of weeks ago. 50 years! What would some one be thinking to take that. Even if you bought a house at 25 years old you wouldn’t be mortgage free until you were 75. Of course interest-only mortgages are even worse than that but if you use an interest only mortgage more as a savings account (a home equity line of credit for example) then I think they can make sense…

  • 2 Canadian Capitalist // Sep 21, 2006 at 10:00 am

    50 year mortgage? Wow. And I thought 35 years was bad!

  • 3 MikeB // Sep 21, 2006 at 4:26 pm

    CC, I got this link via email today. Thought you and others might be interested.

    http://www.clientacc.com/email/JW/0625/EN_email_online.html

  • 4 AJC // Sep 21, 2006 at 9:48 pm

    50 year mortgages are standard in the US, or even 99 year mortgages in England.

    SO 35 years is a new stretch, it basically helps anyone and there dog acquire a home here in Calgary.

  • 5 Baboune // Sep 22, 2006 at 4:21 am

    Hi,

    Recently moved to Sweden. Here 200 years+ mortgages are standard as no one can afford to buy any housing without such incentives. On the plus side, interest paid on mortgages are tax deductible.

    And who is using that? Well I am surely considering it…

  • 6 Ralph Morgan // Sep 23, 2006 at 8:22 pm

    I imagine long term (>25 year) mortgages would be taken out as a form of “low start” loan. Most people would intend to pay them out well before the term expires – eg. when retire, get an inheritance, sell their business etc. etc

    I’d be careful when comparing the total interest payments for a 15, 20 and 35 year loan, as inflation makes the PV of these amounts very different – eg. compare the PV of $344,000 in 35 years time if inflation averages, say, 3% [PV $126,000] with that of $230,000 in 25 years [PV $113,000] shows the difference isn’t as huge as it seems.

    Also, when you consider what the value of the property is likely to be in 35 years the interest paid is likely to be much less than the total interest paid – this is why people investing in real estate choose to borrow as much as possible, even though it increases the interest paid to be more than the rent income received (here in OZ the overall loss is tax deductible against other income, eg. wages).

    Regards
    http://www.enoughwealth.blogspot.com

  • 7 Eric // Mar 20, 2008 at 4:41 pm

    And what about paying out more than your monthly mortgage payment for rent forever? Some people may never pay off their mortgage, so what? Some people pay rent forever. If they can obtain a great house that offers better quality of living, build a little equity and pay less per month than what rent would be, why not get a 50 or even a 99 year mortgage? I would sooner live in a house that may appreciate than pay as much or more per month for rent that offers no quality living and absolutely no chance of getting anything off the monthly payment.

  • 8 lucia // Apr 19, 2009 at 12:10 pm

    A 99 year mortgage means buying a house is within the grasp of more people , the property itself is an investment for the future and can be used as capital.

  • 9 Mike // Jul 30, 2009 at 1:24 pm

    In Canada, when you take a 25 or 35 years mortgage you also take a 5 years contract. Usually, you can pay 100% more then your montly payments and up to 15% of the capital. So if you have a 200k mortgage with 1000$ monthly payment you can pay up to 54k per year, which means you could hypotetically pay in less than 4 years (this is not realistic but it is possible). Having that in mind you will never reach 25 years or 35 years unless you pay the minimum. If you pay the minimum you either are getting screwed or have a mortgage you can’t afford.

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