Canadians Underestimate Mortgage Interest Costs

In a news report by the CBC on July 19, 2007, Toronto-based TransUnion conducted a survey asking consumers how much total interest they’ll pay over a 25-year mortgage and only 20 per cent of Canadians polled gave the right answer.

TransUnion, a credit and information management company, commissioned GfK Roper Public Affairs & Media to conduct the survey in late June, when it polled 1,000 Canadian adults across the country.

The question they were asked was “Homeowners usually pay off considerably more money than the original value of their mortgage loan because of the rate of interest on that loan. On average, what percentage of the original loan amount do you think a Canadian homeowner with a 25-year mortgage would end up paying?”

Only one-fifth of respondents got the right answer; 151 to 200 per cent of the original loan amount is the mortgage cost amortized over 25 years.

“By the end of a 25-year term, if you a have a traditional fixed-rate mortgage at 6.43 per cent, you’ll actually pay close to $200,000 on top of your $200,000 mortgage, just in interest,” said Tom Reid, director of consumer solutions, TransUnion.ca, in a release put out Wednesday.

Women and men were equal in giving the correct response, as were Canadians who owned their homes versus those who rented.

Of those polled, Canadians with more education answered correctly more often.

In total about 45 per cent of those interviewed underestimated the cost of interest over the mortgage’s lifetime.

There are ways to save on interest costs. For example, on a $200,000 mortgage, at an interest rate of 6.43 per cent, amortized over 25 years, Canadians opting for weekly payments (instead of monthly payments) would save $40,000 in total interest charges over the course of mortgage.

Or take that same monthly mortgage and amortize it over 20 years, which would increase monthly payments by about $150, and slash more than $40,000 in total interest costs.