The 30-Year Mortgage: What You Need to Know
We’re counting down our three most popular blogs of 2020, and with the economic state of Canada being top news this year, it’s no wonder this came in at #2.
Here’s what you need to know about the 30-year mortgage.
Mortgages with amortization periods over 25 years are nothing new in Canada, but the trend is on the upswing.
So, could 30 be the new 25 for Canadian mortgages?
The short answer is no, at least not mortgages covered by default insurance. If you have less than a 20% down payment the longest amortization still sits at 25 years, but, once you get past the 20% mark there are many options with longer amortization periods; most lenders will offer 30 years, with a couple even allowing up to 35.
While many Canadians feel extending the amount of time given to pay a mortgage isn’t a wise practice, many need to go with the stretched option – especially since the introduction of the stress test a couple of years ago.
Keep in mind that these extended mortgages are lender-specific, and different lenders may or may not offer them at all, or only offer them with a rate premium.
With this caveat in mind it’s important to reach out to multiple lenders for comparison, or better yet, work with a mortgage broker to source and vet these types of mortgages.
The main draw of the 30-year amortization period is lower mortgage payments. However, this is a sort of catch-22: your mortgage may be roughly 10% lower since it’s spread out over a more extended period, but you will pay roughly 20% more in interest over the life of the mortgage.
You can of course combat extended interest payments by taking advantage of the pre-payment privileges that may come with your mortgage. Finally, consider that with a 30-year mortgage your interest rate may be higher than one with a 25-year amortization, meaning it will also take longer to build equity.
Even with the above conditions, extended mortgages are gaining in popularity. So, what’s the draw?
- Numerous factors fuel the fire here, from home value escalation to overspending, but the primary culprit is the stress test, which reduced Canadian’s buying power by about 20% when implemented. By stretching out the amortization period of a mortgage, Canadians get some of that buying power back.
- As home prices have risen substantially over the last decade, Canadian incomes haven’t been able to catch up, leaving little choice when it comes to longer amortizations. For many, waiting to qualify for the 25-year standard brings fear of not getting into the market at all.
It’s all too easy to fall into incredible debt these days, especially since the economic downturn brought on by the Covid-19 pandemic.
- Taking into consideration job loss, income reduction, student loans, poor spending habits (that are further enabled by easy access to online shopping), and the rising cost of living, drowning in debt is more and more common.
- Canadians are spending more, saving less, cutting mortgage payments, and now extending amortization periods.
There are many variables in every mortgage contract, so it’s important to work with a lender or mortgage broker who can help you weigh which options are most important to you, with one of the more important variables being the amortization period.
According to Tim L. Walker, the Principal Broker at Faris Team Mortgage Brokerage, “the primary reasons why many Canadians are looking at longer amortization periods on their mortgages are affordability and cash flow. Longer amortization periods allow for lower payments, which increases buying power, and lower monthly payments can assist with cash flow.
“It’s also important to consider pre-payment privileges,” says Walker.
“Many prudent clients will opt for a longer amortization period to prepare for circumstances in which cash flow becomes tight but will continue to pay their mortgage like it has a borrowing period of 20 or 25 years. This pro-active move negates the added interest associated with the longer amortization period.”
If you’d like to explore whether or not it makes sense to look at a longer amortization, like a 30-year mortgage, please reach out. We’re here to help and go full out for you®.
While the information contained in this site has been presented with all due care, Faris Team assumes no responsibility or liability for any errors