Last Updated on October 2, 2024 by Finance Faded
Last September 16th, I set out on my usual morning jog. After 6 kilometers, feeling a bit worn out, I decided to take a break and head to the kale smoothie bar near my home. As I approached, I noticed a group of young people celebrating enthusiastically. One exclaimed, “That’s amazing news!” while others chimed in with, “I’m calling my parents right now!” and “Now I can accomplish my dream!” Their excitement was contagious, so I couldn’t resist asking what had them so thrilled.
With a beaming smile, a young man in his twenties turned to me and said, “The federal government just extended the mortgage amortization to 30 years.” I was surprised, to say the least, but I feigned excitement and congratulated them on the news.
Once I got home, I rushed to verify what I had heard. To my astonishment, they were absolutely right. Here’s a quick summary of the announcement that had these young people buzzing with joy:
Starting 15 December 2024, all first-time homebuyers, whether purchasing a new or existing property, will be able to stretch their mortgage over 30 years instead of the current maximum of 25 years. This will apply even if their down payment is less than 20% and their mortgage is insured by the Canada Mortgage and Housing Corporation (CMHC).
This provision will also extend to all buyers of newly constructed principal residences, regardless of whether it’s their first home purchase. On August 1, 2024, access to this type of mortgage was already broadened to a first group: first-time buyers acquiring new properties, representing around 20% of homebuyers in Canada.
Repeat homebuyers, however, must purchase a newly built home to qualify for the 30-year term if insured by the CMHC. Previously, a 20% down payment was required to opt for such an extended amortization.
Moreover, the federal government is raising the price cap for insured mortgages—those with a down payment of less than 20%—by 50%, increasing the limit from $1 million to $1.5 million.
Now, let’s dive into what this all means for your finances. In the following sections, I’ll break down the key points that matter most to us on this blog: the impact on your wallet and how these changes could influence your financial planning and retirement strategy.
I. Potential Impacts on Consumers
As this is a new measure, it’s still too early to fully understand its real impact due to the lack of solid data. However, without dismissing the potential benefits outright, I believe that extending the amortization period could be a double-edged sword. On the one hand, borrowers will certainly see a significant reduction in their monthly payments, which can provide immediate financial relief. This aspect shouldn’t be overlooked, especially for those with tighter budgets.
However, there is a flip side to this. Stretching out your mortgage over a longer period comes with a steep cost—thousands, if not tens of thousands, of dollars in extra interest payments over the life of the loan. The longer you take to repay your mortgage, the more you end up paying in interest.
To give you a clearer picture, let’s take a practical example. Imagine a borrower takes out a $650,000 mortgage (equivalent to the average home price in Canada as of September) with a 5-year fixed term at an interest rate of 4.1%, making a down payment of 10%. For simplicity, let’s also assume that the borrower keeps the same interest rate throughout the entire mortgage period, without renegotiating at the end of each term, which, of course, is unlikely in real life.
Table 1 displays the differences in taking a 30 years mortgage amortization instead of 25 years. I consider both accelerated bi-weekly and monthly payments thanks to the article Maximizing Savings with the Mortgage Payment Frequency Options, recently published on this blog. I strongly encourage you to read it!
Table 1 – Taking 30 Years instead of 25 Years to Pay a Mortgage
| Payment Plan | 25 Years | 30 Years | Difference (30 Years – 25 Years) |
|---|---|---|---|
| Loan | 650,000 | 650,000 | N/A |
| Accelerated bi-weekly payment | 1,727.23 | 1,563.88 | – 163.35 |
| Total cost (principal + interests) | 980,888.71 | 1,049,774.75 | 68,886.04 |
| Monthly payment | 3,454.46 | 3,127.76 | – 326.7 |
| Total cost (principal + interests) | 1,036,337.76 | 1,125,994.06 | 89,656.3 |
Source: Table prepared by Finance Faded using the Financial Consumer Agency of Canada (FCAC)’s mortgage calculator. Calculator, accessed 29 September 2024.
Table 1 shows that with a 4.1% five-year fixed rate, the accelerated bi-weekly payment would be $1,727.23 on a 25-year amortization. If the same borrower was able to sign up for a 30-year amortization, their payment would shrink to $1,563.88, or $163.35-a-biweekly lower. But by taking longer to hack at their mortgage, they would be paying more in interest. With a 30-year amortization, the interest charges would add up to $1,049,774.75, or nearly $68,886.04 more than if they had chosen a 25-year mortgage. This difference worsens even more when you opt for monthly payments.
II. Potential Impacts on Lenders
For mortgage lenders (e.g., banks and other financial institutions), this is undoubtedly a great deal due to the increased interest fees they will collect over the life of the mortgage. Since these are mortgages where the down payments are less than 20%, they are required to be insured by the CMHC or other insurers (e.g., Canada Guaranty Mortgage Insurance Company). In the article, Comprehensive Guide to Life, Mortgage, and Disability Insurance, which I recently shared on this blog, I explained that this insurance protects financial institutions, not borrowers. As a result, banks are taking virtually no risk, especially considering that the property itself serves as collateral. In the event of a default, the bank will recover its money.
If you’re still on the fence about whether to buy a home or not, I recommend reading the article The Great Housing Debate: To Rent or to Buy?, recently published on this blog. The article could help you weigh the pros and cons and make an informed decision.
III. The History of Amortization Periods
- October 2008: The maximum amortization period is reduced from 40 to 35 years.
- March 2011: The maximum period is further reduced to 30 years.
- July 2012: It is reduced once again, this time to 25 years.
- August 2024: The maximum amortization period is extended to 30 years for first-time buyers of a new home.
- September 2024: Eligibility for the 30-year amortization is expanded.
