U.S. President Donald Trump may be touting them as a solution to the housing crisis in that country, but experts say the 50-year mortgage is unlikely to find takers in Canada.
Last week, Trump posted on social media, comparing his proposal to offer longer mortgage terms to former U.S. president Franklin D. Roosevelt’s proposal for 30-year mortgages.
“Thanks to President Trump, we are indeed working on The 50 year Mortgage – a complete game changer,” U.S. director of federal housing Bill Pulte posted on social media following Trump’s post.
The White House says this will help lower monthly mortgage payments, helping new people enter the housing market, but it quickly drew criticism from policymakers, social media and economists.
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Would it save homeowners money?
Extending the life of a mortgage to 50 years does decrease a borrower’s monthly payment, the Associated Press and U.S. analysts noted in an assessment of the proposal.
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The average selling price of a home in the U.S. was US$415,200 in September, according to National Association of Realtors.
Assuming a standard 10 per cent down payment and an average interest rate of 6.17 per cent, the monthly payment on a 30-year mortgage would be US$2,288 while the payment on a 50-year mortgage would be US$2,022.
That’s presuming a bank would not require a higher interest rate on a 50-year mortgage, due to the longer duration of the loan.
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Because even more of the monthly payment on a 50-year mortgage would go toward interest on the loan, it would take 30 years before a borrower would accumulate US$100,000 in equity, not including home price appreciation and the down payment.
That’s compared to 12-13 years to accumulate US$100,000 in equity when paying off a 30-year mortgage, excluding the down payment.
A borrower would pay, roughly, an additional US$389,000 in interest over the life of a 50-year mortgage compared to a 30-year mortgage, according to an AP analysis.
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Other analysts came to a similar conclusion.
“Extending a mortgage from 30 years to 50 years could double the (dollar) amount of interest paid by the homebuyer on a median priced home over the life of the loan and significantly slow equity accumulation,” wrote John Lovallo with UBS Securities.
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Why Canada likely won’t see similar plans
There are some key differences between Canada’s banking system and the one in the U.S., said Penelope Graham, mortgage expert at Ratehub.ca.
In the U.S., the mortgage term — the period for which your rate remains fixed — and the mortgage amortization — the total repayment timeline — is usually, though not always, the same.
For example, for a 30-year amortization, you’re likely to have the same fixed interest rate for the whole period.
“They bundle up all of the mortgages and then they sell them as mortgage-backed securities to investors. That essentially gets the mortgage loans off of the bank’s balance sheet,” she said.
In Canada, the two are usually different. For a 25-year mortgage, you might get a fixed rate for three, five or 10 years.
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“In Canada, we underpin our mortgages with our deposit business at banks and that tends to be shorter term. Savings accounts, GIC terms — that’s what funds fixed rate mortgages (in Canada),” she said.
Canada’s system of linking mortgages to bank deposits is not as risky as the U.S. model, she said, and was lauded during the 2008 housing bubble crisis.
The differences mean any potential of Canada taking a similar approach to extend mortgages “seems unlikely,” said Dan Eisner, CEO of Calgary-based True North Mortgage.
Most borrowers in Canada are eligible for 25- or 30-year mortgages, with a 40-year amortization available for some sub-prime loans, Eisner said.
“CMHC has a program for multi-family properties that meet certain affordability targets. Those builders are actually able to get a 50-year amortization, but that’s a very different model (than residential buyers). It’s a commercial property, it’s an 80-unit multiplex, and it just lowers the cost of making the cash flows work,” he said.
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If Canada were to introduce 50-year amortizations, it would result in a dramatic decrease in monthly payments, a Ratehub.ca calculation shared with Global News shows.
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Ratehub took the example of a home costing $680,000, just slightly more than the average home price in Canada as of September, according to the Canadian Real Estate Association (CREA).
Assuming a buyer has a 10-per cent down payment, they would have a total mortgage amount of $630,972.
Currently, at a 25-year amortization at an interest rate of 3.79 per cent fixed for five years, their monthly payment would come to $3,248. Spread over 30 years, it would be $2,932.
A 50-year amortization would get this homebuyer a monthly payment of $2,334.
That would mean monthly savings of $914 compared to the 25-year mortgage and $598 compared to the 30-year mortgage.
However, like in the U.S. analysis, the key issue would become the amount of extra interest charged on a longer loan.
“The trade-off is always a lot more interest paid over the lifetime of the mortgage. And when you’re paying more in interest, you are building your equity more slowly,” Graham said.
The interest you pay over the years would rack up significantly, Eisner warned.
“You’d be paying over two and a quarter times the amount of interest over a 50-year period,” he said.
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“Your [monthly] payment would be 25 per cent lower. Cool, but your principal is going to be paid down way slower. And a lot of Canadians use their house as a form of savings,” Eisner said.
Similar concerns were raised by U.S. experts.
The average age of a first-time homebuyer has been creeping up for years and is now roughly 40 years of age. A 50-year mortgage would be difficult to underwrite for a bank for a 40-year-old first-time homebuyer, who would be 90 years old by the time that home is paid off, the Associated Press noted.
The average life expectancy of an American is now roughly 79 years, meaning there’s 11 years of life expectancy not covered in a 50-year loan.
“It’s typically not a goal of policymakers to pass on mortgage debt to a borrowers’ children,” Konczal said.
According to Canada Mortgage Housing Corporation (CMHC), around half of all first-time homebuyers in Canada are between the ages of 25 and 34.
For someone buying their house at 34, a 50-year amortization would mean they wouldn’t be debt-free until they turn 84.
“You could be carrying that debt well into retirement. And that impacts your ability to save for retirement. You can’t rely on the equity that you’ve built up in your home, because that equity is not yet there,” Graham said.
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“A 50-year mortgage that would be creating a borrower for life. You’re essentially staying a renter throughout your lifetime because you’re never going to stop paying down your property,” she added.
–with files from Associated Press
