With the introduction of the 40 year mortgage in Canada, people who couldn't afford a home before can now own a home due to lower monthly payments.
For example, a $200,000 mortgage @ 6% over 25 years would cost approximately $1280 / month. Over 40 years, the payments would be $1090, or a difference of $200/month.
The biggest difference however, is not with the monthly payment, but with the total interest paid over the term. The 25 year mortgage would result in the total interest of $184,000 but the 40 year mortgage would result in a staggering $323,000.
With the huge difference in total interest paid over the term, one would think that it would never make sense to go with a 40 year term. Hold on though, there are advantages and disadvantages of the 40 year mortgage.
- Lower monthly payments so that your cash flow is better.
- Might be a decent mortgage choice if you plan on moving in the near future. You'll get the cash flow now and the longer term won't matter much when you sell.
- As stated above the total interest paid for a 40 year term compared to 25 can be drastic.
- If you plan on living in the house for the long term, then 40 yrs of interest can be a wealth killer.
If you can afford it, I'm an advocate of lower amortization mortgages as longer terms result in drastically higher interest. However, if you need to go with the 40 year amortization for the cash flow, I would suggest that you take any extra money during the year and put it down on the mortgage as that will help decrease the interest burden in the long term.
In my opinion though, if you can't afford a 25 year mortgage on the home that you want, then the home is too expensive.
For those of you who tend to be more literal, the photo is meant to be sarcastic.
Photo courtesy of Mike LichtIf you would like to read more articles like this, you can sign up for my free weekly money tips newsletter below (we will never spam you).