Amortization extensions raise questions about home affordability

With interest rates rising 3.5 percentage points this year, and the Bank of Canada poised for more rate hikes in the coming months, more homeowners are seeking longer amortization periods in an effort to avoid default and make their payments monthly are more affordable.

But some industry experts warn that increasing amortization periods is just a Band-Aid fix to a much deeper financial wound, one that won’t necessarily heal with more time.

Max Rafael, a mortgage broker serving clients throughout Ontario, believes it is imperative that homebuyers and homeowners not be “shortsighted” when it comes to dealing with rates.

“Not only when buying and getting a new rate, but also when you’re in the middle of a variable term rate, which is something a lot of people are dealing with right now,” he said in a phone interview with on Tuesday. .

“Obviously, telling a customer whose payment might have doubled or even tripled over the last year to wait another year is a huge challenge,” he said. “Not everyone is in a financial position to actually do that.”

As the Canadian Consumer Financial Agency Explain, the longer your repayment period, the lower your payments. But when you take longer to pay off your mortgage, you pay more in interest.

According to CIBC Q4 earnings release, CIBC saw its repayments skyrocket after the fourth quarter, with a third of its mortgage portfolio at variable rate. The bank also reported that 26 percent of CIBC’s residential mortgage portfolio now has amortization approvals of 35 years or longer.

Similarly, T.D. reported that 25.2 percent of its mortgage portfolio now has 35-year amortizations.

Spreading out your amortization, Rafael said, effectively means that if you make your monthly payment over a longer period of time, you can handle rising costs.

Rafael calls amortization the “life of your mortgage”.

“If you have a 30-year amortization, that basically means that if you make your monthly payment every month for 30 years, then you’re mortgage-free after that.”

The longest amortization a borrower is allowed under federal law is 25 years if their down payment is less than 20 percent, but borrowers can get much longer amortization periods if they pay at least 20 percent.

“You really need to look in the mirror and say, ‘Can I really afford this place?’ Forty years is a long time to pay off a mortgage. Where do we draw the line?” Rafael said.

Stress tests and qualification fees, Rafael added, protect buyers and clients from signing home contracts that they may not be able to afford in the long term.

This is especially the case for fixed income buyers.

“If rates go up two percent and you are a salaried employee, you have no other source of income. What are those people going to do if rates go up two percent, which we saw happen this year? Many of those people are struggling right now.”

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