The Royal Bank of Canada recently issued a report that 50% of borrowers of insured mortgages are opting for extended 35 and 40 year amortizations (a mortgage is insured when the down payment is less than 20% of the purchase price). Critics of the longer amortization argue that borrowers will pay more interest in the long run. In a recent National Post article on the topic, an example of a $340,000 home with 25% down and a 7% mortgage rate was used -- the article stated that the borrower would pay an additional $47,000 by opting for a 40-year amortization instead of the traditional 25-years.
There are a number of factors influencing a home buyer's decision when choosing the amortization on their mortgage. Firstly, there is an affordability issue -- you can't ignore the fact that over the last 10-years real estate prices have gone up considerably. Given the high cost of real estate in Canada, especially in Toronto, the payment on a mortgage amortized over 25-years is just not realistic for some people. In looking other countries, you find that Canada one of the last developed countries in the world to introduce mortgage amortizations longer than 25 years.
By reducing your monthly payment, it might make it possible for you to buy a bigger house, or a house in a more desirable location that will better meet your long term needs. No-one wants to move into a home they are likely to outgrow in 3-years.
Couples may want to start a family and reducing their monthly mortgage payment will give them a bit of extra breathing room. As a result they may be under less stress to have mom or dad get back to work as quickly after having a baby. Less stress on families today probably isn't a bad thing.
Finally, just because you choose a 40-year amortization when your mortgage closes, it doesn't mean you have to be paying the mortgage for the full 40-years! There are ample prepayment privileges with most mortgage products, and if your financial situation changes you can accelerate your payments and pay down the mortgage much faster.
