The 30-Year Mortgage: A Brief Overview
The following is a brief overview of the 30-year mortgage. Firstly, mortgages with amortization periods great than 25 years are not new in Canada, but the trend is on the upswing.
Are 30-year the new 25-year amortization period for Canadian mortgages?
The answer is no at least not mortgages that are protected by default insurance. As a purchaser, if you have less than a down payment of 20%, the longest amortization is 25 years, however if your down payment is higher than the 20% threshold, there are additional options with longer amortization periods such as 30 years, with potentially options up to 35 years.
Even though, many are of the opinion that extending the amortization period or the amount of time to pay off a mortgage is not a smart choice, many need to go with the extended option; this is especially the case since the introduction of the ‘stress test’ as part of the qualification process introduced a couple of years ago.
Keep in mind that extended mortgages are lender-specific. Not all lenders offer them… and may call for an interest rate premium.
With this in mind, we suggest reaching out to different lenders for comparison purposes, and/or employ a mortgage broker to source mortgage options.
The main reason that people pique interest of the 30-year amortization period is lower monthly mortgage payments. However, your mortgage may be roughly 10% lower since it is spread out over a longer time period, however you will pay more cumulative interest over the life of the mortgage which could be in the order of 20%.
One can contest extended interest payments by taking advantage of any pre-payment privileges that may apply with your mortgage. For a 30-year mortgage, your interest rate may be higher than one with a 25-year amortization, which means it will also take longer to build equity.
Why are extended mortgages drawing piquing interest?
This interest in longer term mortgages is likely based on several factors including home value escalation, general overspending and the stress test. The latter consideration has reduced our buying power by about 20%. By stretching out the amortization period of a mortgage, Canadians have lower monthly mortgage payments and feel they get some of that buying power back.
As home prices have risen substantially over the last decade in general, Canadian incomes haven’t been able to catch up, leaving little choice when it comes to longer amortizations for many. To ‘get into the market’, some buyers have no alternatives but to enter into a longer amortization period mortgage.
Covid-19 has put a lot of pressure on home ownership.
Factoring in job losses over many sectors, income reduction, other loans such as student loans, poor spending habits that are further enabled by easy access to online shopping, and the rising cost of living, people in general have more debt than every before in the past.
In general, we are spending more, saving less, adjusting mortgage payments, and now extending amortization periods.
There are many variables in every mortgage agreement, and as such, it is important to work with a specialist, a lender or mortgage broker, who can assist you evaluate options to determine which is best for you.
