Is a 40-Year Mortgage Hazardous for your Financial Health?
John Pasalis in Money, Home Buying Tips
Last week, the Toronto Star’s Ellen Roseman wrote an article titled 40-year Mortgage Comes with Hidden Hazards. On Move Smartly, we often try to pick up where the main stream media left off. Instead of just telling readers the 40-year mortgage is bad for their pocket books, we try to give practical advice that addresses the needs of today's home buyers.
Let me start off by saying that a 40-year mortgage is not for everyone. Anyone who qualifies to buy a home with a 25-year mortgage but opts for a 40-year mortgage instead because it leaves them with a little more spending money in their wallets is downright foolish. If you want more spending money in your pocket, spend less on your home - don’t get a 40-year mortgage and pay more interest over the life of that mortgage.
Having said that, does this mean that a 40-year mortgage is wrong for all home buyers? Is a 40-year mortgage like long term renting? Not quite.
Unlike Roseman, many of today's first time buyers are not buying their first home with their partners and therefore don’t have the luxury of counting on a second income to help pay their mortgage. Last year, the Toronto Star reported that single women account for 20 per cent of Toronto's real estate market. Many of the home buyers who are turning to 40-year mortgages are single income buyers who can’t afford to buy a home with a 25-year amortization.
So what is a single (or similarly positioned) first time home buyer to do? Should they eschew buying a home today out of fear that they’ll be paying their mortgage well after they’ve retired, as Roseman suggests. This is definitely one option.
But if the single home buyer shouldn’t buy today, when should they buy? Should they wait another 5-10 years for their salary to increase enough for them to afford a home with a 25-year amortization? This strategy is also risky, since renting and delaying your purchase for 5-10 years also pushes your mortgage payments further into your retirement years.
For the home buyer who doesn’t want to wait another ten years to be able to afford a home with a 25-year mortgage, here are a couple of tips to help you beat the risks and costs of the 40-year mortgage.
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Banks go to the bond market to borrow the money that they in turn lend to you for your five-year mortgage. The rates that banks pay to borrow the funds often depends on the yield for comparable five-year bonds in the marketplace. One of the benchmark yields that the industry keeps an eye on is the yield for five-year Government of Canada bonds. The yield on government bonds is important because they typically represent the most secure bond in the market. This means that the interest rates that banks are paying to borrow money, and the interest rate you are paying for your mortgage, is going to be at some premium over and above the current yield for a comparable government bond.






