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12 Nov

Is retirement chained to your home?


Posted by: Kimberly Walker

Is retirement chained to your home?

Garry Marr, Financial Post · Tuesday, Nov. 9, 2010

Canadians plan to take longer to pay off their mortgages, maybe even 35 years, but they don’t expect it to affect their retirement plans. Something in that plan just doesn’t add up.

A new study from the Canadian Association of Accredited Mortgage Professionals (CAAMP) shows consumers are taking advantage of longer amortization lengths at previously unheard of levels. Statistics released this week show 42% of mortgages originating in the last year went for an amortization period of more than 25 years.

It’s a huge jump when you consider that just five years ago, you couldn’t even get an insured mortgage backed by the government that was amortized above that period. Now the government limits insured mortgages to 35 years.

The reason for the longer amortization periods is simple: you can qualify for more mortgage when your monthly payment is lower because it is spread out over 35 years rather than 25.

Within the same survey by CAAMP, consumers were asked about their retirement expectations. Those with extended amortizations plan to retire on average at 61.9 years old. Those amortizing their mortgage for less than 25 years plan to retire on average at a surprisingly similar 61.5 years old.

“This data on expectations does not prove that actual retirement will be unaffected by recent trends in housing and mortgage markets,” CAAMP says in its study. No kidding. “But it does suggest that consumer’s evaluations of their life-cycle options have not been materially altered.”

Are consumers being entirely realistic about their future?

Will Dunning, chief economist with CAAMP, says the percentage of Canadians retiring with a mortgage is small — small enough that it is difficult to track.

“We find a lot of people taking [longer amortizations] are making additional payments,” Mr. Dunning says, adding previous studies have shown people try “aggressively” to repay their mortgages.

Victor Fiume, president of the Canadian Home Builder’s Association, says Canada is just catching up to a trend that has taken place in other jurisdictions.

“In many, many countries across the world, paying off a home is a multi-generational kind of thing. It doesn’t happen in this generation. Lots of the stuff going on in England is multi-generational because the houses are so expensive,” Mr. Fiume says.

There is no arguing the increased flexibility a longer amortization mortgage gives, but increasingly some consumers find themselves getting into financial trouble because they have bitten off too much, says Patricia White, executive director of Credit Counselling Canada.

“People will always decide what is easiest for them,” she says. “But you have to plan in advance to make accelerated payments. You need to make some conscious decisions about how to get rid of that mortgage debt faster.”

Canadians always do better when they have direct withdrawals from their bank accounts and less discretionary power about paying down debt, Ms. White adds.

Vince Gaetano, a principal broker and owner at Monster Mortgage, agrees people who choose the longer amortization and the lower payment rarely take advantage of that extra cash flow to make additional payments later on. “It’s a very small group of people who do that,” he says.

He thinks consumers going for the longer amortization are banking on the fact their homes are going to rise in value faster than any gains they get paying their mortgage off earlier.

“Real estate over time will appreciate at more than 2% to 4% per year,” Mr. Gaetano says. “People are saying, ‘It won’t affect my retirement because I plan to retire with a home that will appreciate in value [in addition to the principal you are paying down].’ It’s not a bad strategy if you are in a market that gives you consistent appreciation, but you are not going to get that in every market in Canada.”

There is no getting around the fact the people who take a longer amortization will take longer to repay their loan. The CAAMP study found consumers going longer than 25 years, were done with their mortgage at age 53 on average, compared with an average of 47 years for those going for the less than 25 years.

If you are going for a longer amortization, you better hope your home goes up in value because you are going to have fewer mortgage-free years in which to save. It’s hard to believe that won’t affect retirement plans.
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