Trump's 50-Year Mortgage and What It Means for Canada

Mr. Trump and the housing market, again. This time it is about a plan floated in the United States to make 50-year mortgages possible, and plenty of people in Canada are now thinking about the same idea. But is it a good plan, and what is the catch for families and homebuyers here? I'm Moe Asgarian, principal real estate broker in Toronto and ranked #47 worldwide at RE/MAX. Let's talk it through.

Where the 50-Year Mortgage Idea Came From

Once again, comments from Mr. Trump about housing have kicked up a debate, this time over 50-year loans. Some experts point to the upside. If families can pay their mortgage back over 50 years instead of 30, the monthly pressure drops. As Mr. Trump puts it, you pay less each month, the term just runs longer, no big deal, and it might even help. He has a point. When your monthly payment is lower, you can invest the difference or spend it on something more important. But stretching a mortgage out has downsides too.

The Real Cost of Stretching a Mortgage

One problem is that households end up paying the bank a lot more interest. People sat down and did the math on how much that extra 20 years costs. The average home in America runs about $415,000. If someone stretches that loan to 50 years, they pay roughly $389,000 more than they would on a 30-year loan. Here is why: when the payback period gets longer, the early years are almost all interest. Only after several years do you really start paying down the principal. And that long horizon carries risk for the banks and lenders too.

Why Canada's Banks Work Differently

Come back to Canada and you see the banks will not take on that kind of long-term risk. In the US, people can lock a fixed rate for 30 years and never renew. Canada's banking and lending structure does not work that way. Here you usually renew every few years, so over 25 years you see the rate change at least three or four times. There is another difference in how mortgages get valued. In Canada the risk of the mortgage always sits on the bank's shoulders. In the US it does not, because banks ultimately sell that loan as securities and take the burden off their own books. That is exactly why banks in Canada fix a mortgage rate for 10 years at most. You can get a fixed rate for one, two, three, up to ten years, but no Canadian bank is going to hand you a 30-year fixed mortgage like in the US.

Canada Has Been Down This Road Before

Longer terms are not unheard of here. Back in 2007, under Stephen Harper's government, 40-year mortgages were allowed. They existed, but the plan lasted only about a year. The moment the US mortgage crisis hit, they turned them into 35-year mortgages and reined it in. Even now there are some lenders who go up to 40 years, but the main players, the big five Canadian banks, generally do not lend beyond 30 years. Then we watched them step it down further, to 25 years for insured mortgages and 30 years for uninsured ones. My point is that Canada has already walked this path once.

Could Canada Extend Mortgage Terms?

That said, the government did give first-time buyers a nice break last year. It announced that these buyers with an insured mortgage can take a 30-year loan. People in the mortgage business here would not mind seeing that 25 stretch to 30. The reason is obvious. As a buyer, you naturally want the loan with the lower monthly payment. You take on a $3,000 payment more easily than a $5,000 one. But experts across Canada give a warning. Adjusting the length of a loan has to be done carefully and based on the real facts of the Canadian economy. A decision that puts the financial and monetary system at risk is not a smart one. The government may revisit this and, down the road, allow more groups to take terms longer than 30 years. We are still a way off from that day, but we do know that longer mortgage terms tend to pull more investment into this market.

If you are trying to figure out the right mortgage term for your own purchase, fill out the form at the bottom of this page or book a free consultation, and my team and I will help you sort it out. Stay well and take care.