Longer amortization periods leave some mortgage holders 'stuck' and unable to get ahead financially
Delays in paying off your mortgage could costs tens of thousands, impact savings and retirement
Calgary mortgage broker Max Singh says it's like running full tilt, but getting nowhere.
A financial morass where you can't get break free.
"You're not moving forward with your financial picture," said Singh.
Singh, who's been in the financial services sector for 20 years and a mortgage broker in Calgary for the past nine, says he's seeing more clients accept longer amortization periods to lower their borrowing costs.
Thirty-year terms, even 35.
Singh says in many cases it involves clients who are trying to refinance an existing mortgage with a variable interest rate and are seeking relief from rising interest rates.
"They're coming back to their institution being on variable rates, looking at extending that amortization due to the impact of rising interest rates on their monthly borrowing costs," he said.
He says new clients seeking their first mortgage are also opting for longer amortization periods.
Singh says some clients are unable to secure financing from the big banks and turn to private lenders, who in some cases charge much higher interest rates.
"That is leading to massive increased costs on the back end, primarily interest costs being paid for a significant period of time."
Big banks see big amortization periods
Two of Canada's big banks say they are seeing an increase in customers seeking longer amortization periods for their mortgages.
RBC says in its most recent report to shareholders that 43 per cent of its mortgages carried amortization periods greater than 25 years, nearly one-quarter of them (23 per cent) carried an amortization period greater than 35 years.
TD Bank's numbers are slightly higher at 48 per cent of remaining amortization periods greater than 25 years. TD's most recent quarterly report also shows 23 per cent of those mortgages have an amortization period of 35 years or more.
More interest, delayed savings and retirement
According to the Credit Counselling Society, a non-profit group that helps Calgarians with budgeting and restructuring their debts, there's a big problem with these longer amortization periods: more interest payments, and delayed savings and retirement.
Mark Kalinowski is a financial educator and credit counsellor with the society. He says most people who are taking longer periods of time to pay off their mortgages aren't doing so voluntarily.
"People aren't entering into these amortizations, they're falling into them," said Kalinowski.
He says many are "trapped" into them.
"They're going to pay substantially more interest, tens of thousands, perhaps hundreds of thousands of dollars more over a 35-year [period] as compared to a 25-year amortization," he said.
He says that will often "rob" people of the ability to do other things, including saving money and planning retirement.
"Over the long run they will endure hardship as a result."
Longer amortization, shorter terms
The Canada Mortgage and Housing Corporation, which among things, provides mortgage loan insurance for homebuyers, says several trends have emerged since the Bank of Canada started boosting its benchmark interest rate in early 2022. After 10 consecutive increases, the key rate now sits at five per cent.
"Borrowers are adjusting to this new high interest rate environment and they're really changing their behaviours in some way," said Tania Bourassa-Ochoa, a senior economist with CMHC's research division.
She says the majority of mortgages in Canada — 60 per cent — have amortization periods longer than 25 years.
The first trend the federal agency has been tracking includes shorter mortgage terms with longer amortization periods.
"But now in this context, we're really seeing a lot of one-year, two-year mortgage loans and so it's really showing this expectation that interest rates might be going down," she said.
A shorter term with a longer amortization can help homebuyers reduce their monthly payments.
"They're really trying to reduce their debt service and cost in the short-term, even though that means that they're going to be paying their mortgage over a longer period of time."
The agency is also seeing alternative lending sources become more popular as more people are unable to secure financing from traditional lenders, such as Canada's big chartered banks.
Another trend that is emerging, according to the federal housing agency, is that more people are facing financial strain.
"So we're seeing that delinquency rates on other products like car loans or credit cards are coming up significantly higher," said Bourassa-Ochoa.
Singh, the mortgage broker, is hoping for some positive news when the Bank of Canada makes its next interest rate announcement on Wednesday.
"It's is going to set the tone, I think, across country with respect to housing, business investment, consumer sentiment and just help people sleep better at night, hopefully."
Bryan Labby is an enterprise reporter with CBC Calgary. If you have a good story idea or tip, you can reach him at bryan.labby@cbc.ca or on Twitter at @CBCBryan.