Where will you be in 2048?

Sherri Grosz

Where will you be in 2048? How old will you be? What will your life be like? Will you still be paying a mortgage?

More and more Canadians are saying yes to the last question. In 2007, nearly 40 percent of mortgages carried terms (or amortizations) longer than 25 years, compared to only nine percent of mortgages in the previous year. Clearly, longer terms are popular! Spreading payments out over 10 or 15 more years means you pay less per month. This can make home ownership affordable in households where budgets are tight. However, stretching out your payments costs you a lot more in total interest charges and increases the risk that you could buy more house than you can really afford. The table below illustrates a $100,000 mortgage, and assumes a 6 percent interest rate with regular monthly payments.

In this example, choosing a 40-year mortgage would free up nearly $300 per month over a 15-year mortgage. This money could be used for utilities, taxes, repairs and maintenance on your new home. It’s an attractive choice. But make sure you consider the cost! A 40-year amortization costs you a whopping $161,000 in interest alone. In the end, you will have paid $261,000 for a $100,000 loan.

The Bible reminds us that "the borrower becomes the lender’s slave”, Proverbs 22:7. There is a cost and a risk to borrowing. Sometimes you really can’t afford a house yet, even if you are able to squeeze out the payments. Sometimes it is better to rent, to limit debt and to continue saving for a down payment on a home. Keep in mind that it’s not just a mortgage payment you are adding. Before you buy, you also need to consider the other costs such as property taxes, repairs, utility bills and the pressure to keep up with the neighbours new cars, decks and landscaping.

Some lenders will ask what you would like your monthly payments to be rather than asking what term or amortization you would like. In the example above, they might ask if you would like your payments to be $545, $640 or $840 per month. Uneducated borrowers might jump at $545 and not ask any questions. Knowing that they will end up paying 2.5 times the loan amount could cause them to consider other options.

When considering a mortgage, don’t be a slave to your lender. Before you talk to a lender, do your homework: ask around for advice and use financial calculators to find out the total cost of borrowing.

Buying a house can be an overwhelming and lonely experience. Consider inviting a trusted couple or individual in your church to walk alongside you through the process. Perhaps your church could consider offering a basic personal finances course that includes information on mortgages and debt. Mennonite Foundation of Canada’s First Things First resource covers personal finance from a Christian perspective. Call your nearest MFC office for a copy.

Home ownership is a worthy goal. Be certain you count the true and total cost, and understand how much debt you are really taking on prior to signing any papers.

First published in 2008.