Mr. Affordability says: Is mortgage term a silver bullet for affordability?
“Be careful not to make assumptions when trying to maximize affordability using the term of the mortgage.”
Simple logic suggests that there is a direct relationship between term and maximum borrowing, so brokers looking to maximize borrowing often choose the longest term available, say 35 or even 40 years. But is this the right strategy?
We used MBT Affordability to research this common scenario:
• Two candidates with a child.
• A good salary and a part-time salary
• Small credit card balance and moderate car financing
So what if we flex the term?
The first thing we noticed is that the maximum loan is actually higher for a 35-year term rather than a 40-year term. This is because the lenders who offer 40 year maturities are not necessarily the ones who offer high income multiples.
In addition, reducing the term from 35 to 20 years only reduces the maximum loan by 5%. And a reduction from 35 to 25 years translates to a reduction of just 1.8%.
Different lenders are at the top when it comes to maximum affordability in this scenario depending on the term, but in this case it is still the same at the bottom – although we do not disclose and are ashamed of the opportunity.
Another interesting trend is that the range of maximum loan amount offered by lenders increases as the term decreases. The 35-year range is 20% while the 15-year range is 53%. The ranking of lenders also varies a lot more than you might think.
The simple lesson here is that nothing is simple in affordability. Be careful not to make assumptions when trying to maximize affordability using the term of the mortgage.