The Canadian mortgage landscape has no doubt shifted in recent times, with houses unfortunately becoming increasingly difficult for many Canadians to own. This in turn has led to an evolution in how mortgage terms have shifted to try and make home ownership more achievable. An example is the 47-year mortgage, which has recently begun to gain attention from both aspiring homeowners and financial experts. In this article, we explore the 47 year mortgage; how it works; and what it could mean for you if you are an aspiring homeowner, or if you are struggling to make your current mortgage payments.
What is the 47 year mortgage?
In the past, Canadian mortgages have typically had terms of 25 to 30 years. The 47 year mortgage, however, allows a significant extension on this repayment period to allow borrowers up to 47 years to repay their loan in full. The logic behind this is to allow mortgage repayments to be reduced, to make owning a home much more affordable for many more households. This is especially the case in areas of the country with high real estate costs, including cities like Toronto and Vancouver, where high rental costs have become very difficult for many.
Why has the 47 year mortgage come about?
According to the Office of the Superintendent of Financial Institutions (OSFI), around one in five variable rate mortgages in Canada are in ‘negative amortization’. This is where the time taken to repay a mortgage in full is getting longer and longer. Years are added to the payment term of the original mortgage because the monthly payments are not enough to cover any of the mortgage principal, only the interest. This is due to the steady increase in interest rates over the past couple of years. In fact, the regulator OSFI thinks there are around $250 billion of home loans spanning 35 years or more. With around 100,000 mortgages due for renewal in Canada each month, this figure is only set to increase. Regulators are looking at ways to restrict the type of loan that allows such long extensions on mortgages, although to some Canadians, it is the only way they can aspire to secure a mortgage. Guidelines for the mortgage market are soon expected to follow, intended to reduce the risks of negative amortization mortgages, including the 47 year mortgage.
What are the advantages of a 47 year mortgage?
There are a number of benefits to extending your mortgage period across 47 years, including the following:
- Lower monthly payments – by increasing the repayment period to 47 years, monthly mortgage payments are likely to be reduced dramatically. This can take off some of the pressure of paying expensive mortgage payments each month – especially for first time buyers or those with limited funds.
- Greater affordability – if you can secure lower monthly payments, you are more likely to be able to qualify for a mortgage and afford it. For many Canadians, this would not be the case for a standard 25 or 30 year mortgage.
- More disposable income – with lower monthly payments, you can expect to have more disposable income. This can be put towards debt repayments, savings, or even improving your overall financial situation.
What are the disadvantages of a 47 year mortgage?
A 47 year mortgage also has its downsides:
- Longer repayment term – by extending your mortgage term to 47 years, you are likely to be in mortgage debt for the majority of your life. This could mean you pay a lot more interest than you would in a traditional mortgage.
- Risk of overpayment – if you are repaying over a longer period of time, you can end up paying a lot more for your home overall due to additional interest. This could mean the lower monthly payments are outweighed by the cost you pay.
- Slow accumulation of equity – with lower monthly payments, the rate you accumulate equity on your home will be much slower. This can delay other financial goals you might have, like investing or saving for retirement.
Is a 47 year mortgage the right choice for you?
Understanding whether or not a 47 year mortgage is right for you requires a careful review of your financial circumstances, goals, and tolerance to risk. You might want to ask yourself the following questions:
- How is your current and future financial stability looking? Do you think you could see a considerable income increase in the future? If so, a 47 year mortgage might be a good move.
- What are your long-term financial goals? Is owning your own home a priority? If a 47 year mortgage is a way to achieve this, it might be a move that is right for you.
- Have you spoken to a financial advisor? If you need support in analyzing the potential effects of a 47 year mortgage on your finances, it is a good idea to seek professional advice. If you are struggling with debt payments and are worried about taking on a mortgage, speak to a Licensed Insolvency Trustee at Spergel. We have helped over 100,000 Canadians gain debt relief, and we are here to help you too.
What are the alternatives to a 47 year mortgage?
It is difficult for anyone to know if the mortgage rates will come down anytime soon after a period of continued increase. For this reason, it might be a better idea to opt for a short-term, fixed rate loan to ride out the current volatility. Buying some time could pay off longer term, meaning you could avoid making such a long term commitment with a 47 year mortgage. Some lenders are also beginning to limit the ability to extend your mortgage to such a long period of time by requiring lump sum payments close to the limit. They could also switch you to a fixed rate with higher, yet more stable, payments. Every individual’s situation is different, so it is important to seek professional financial advice before taking on mortgage debt.
Ultimately, the 47 year mortgage has both pros and cons. It is really important to carefully review your finances and goals before committing to an obligation that is so long term. Making a sensible decision that is well informed and ties in with your financial goals is key when considering any mortgage, let alone the 47 year mortgage.
What if I cannot afford my mortgage?
If you have a mortgage in place and are struggling to make your repayments, firstly do not panic. There is help available, and there is a solution no matter how bad you might feel your circumstances are. With the cost of most things in Canada increasing currently, banks and financial institutions have likely never been so understanding of the financial hardships many individuals are facing. Even small interest rate increases can hit your wallet hard. Here is our advice on what to do:
- Contact your lender if you are struggling, and explain your situation – they may be able to give you temporary relief, a mortgage payment holiday, or reduce your monthly payments by extending your repayment period. Lenders will want to work with you as best they can to try and work on a repayment plan that works for both of you.
- Understand how any mortgage rate increases affect you, and what this means for you and your finances.
- Lock in your mortgage interest rate for as long as you can, provided it is affordable. With further increases in the future looking likely, you may wish to lock in your rate for as long as you can. Speak to a mortgage broker or financial advisor for further advice on locking in your rate.
- Reduce your expenses where possible. Learning how to budget is a valuable skill that could save you thousands, and train yourself out of being reliant on credit cards. See how you can cut back simple things like takeout coffees to make small savings each day.
- Speak to a Licensed Insolvency Trustee. It could be that substantially reducing or eliminating your unsecured debts could allow you to make your mortgage payments much more easily. At Spergel, we can review your financial circumstances and one of our experienced Licensed Insolvency Trustees will advise you on your debt relief options.
Learn more in our article on how to afford mortgage rate increases. If you are considering a 47 year mortgage and feel concerned about your ability to make mortgage payments, book a free consultation with Spergel. Our experts will assess your financial situation, and share your options on a pathway to debt relief. We have helped over 100,000 Canadians gain debt relief, and we are here to help you too.