B y next week, my husband and I will finish making payments on the Toronto house we bought in August 1986.

Yes, we're breaking free from a 25-year mortgage with a little more than three years to spare.

If we were buying that house today, we'd probably spread the payments over 30 to 40 years, as do most buyers.

And we'd be paying off that mortgage long after we retired – or working into our late sixties to retire the mortgage.

The advent of extended amortizations has extended Canada's real estate boom, as noted in last Wednesday's column.

But the popular 40-year loans hold dangers for homeowners that aren't always stated.

• You have less chance of being debt-free in retirement or retiring early.

"I think of a 40-year mortgage as long-term renting," says Adrian Mastracci, a Vancouver investment counsellor.

"It's a recipe for not going into retirement and extending your time in the workforce."

• You won't build equity in your home for many years.

Building equity takes a long time, even with a conventional 25-year loan.

Suppose you have a $200,000 mortgage amortized over 25 years, with a five-year term at 7.19 per cent (the current posted rate at big banks).

Your payments are $1,424.37 a month, or $17,092.44 a year.

Only by year 16 do you reach the point where more than half your payments go to principal, not interest.

Now let's take that $200,000 mortgage and amortize it over 40 years, with a five-year term at 7.19 per cent. Your payments go down to $1,255.17 a month, or $15,062.04 a year.



But only by year 31 – gasp – will you be paying more principal than interest.

(I used the mortgage analyzer calculator at the Canadian Association of Accredited Mortgage Professionals's website, www.caamp.org.)

You may owe more than what the house is worth if there's an economic decline.

Suppose you put little or no money down when you buy a house. You have to buy mortgage default insurance, which adds 2.7 per cent to 3.1 per cent to the loan amount.

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Spreading the payments over 40 years will boost the cost of mortgage insurance.

John Cocomile, who runs a mortgage brokerage firm in Toronto, GreedyMortgage.com, shows what can happen in his worst-case scenario.

You buy a house for $450,000. You make no down payment and go for 100 per cent financing with a 40-year amortization.

You have to pay 3.7 per cent of the loan value to Canada Mortgage and Housing Corp. (or $16,650).

So, now you owe $466,650 – more than the home's market value – before you even move in.

And with a 40-year amortization, it could take a decade or more to repay the CMHC premium, let alone make a dent in the mortgage.

In Cocomile's view, many buyers could owe more than the value of their properties if there's a period of slow growth or recession.

They would have no equity to borrow against, and nothing to fall back on, if they lost their jobs and couldn't pay their mortgages.

So, keep these dangers in mind when starting out in real estate or upgrading to a more expensive property.

If you opt for a longer payback period, start accelerating your payments as soon as you can.

Retiring debt provides a risk-free after-tax return approaching 10 per cent, one of the best you can get in today's volatile markets.





Ellen Roseman's column appears Wednesday, Saturday and Sunday. You can reach her at eroseman@thestar.ca.



