How Long Should I Amortize My Mortgage?

By Mckenzie Esposito

While 25 years may still be the so-called norm for mortgages under CMHC, 30-year amortization periods have become far more common when it comes to low-ratio mortgages in Canada. 

Canadians commonly shy away from extending the period of repayment for mortgages but may be missing out on opportunities for short-term savings. First, a definition of low-ratio mortgages (also known as conventional mortgages) might be appropriate. Low-ratio mortgages are simply those that begin with 20% in equity or more. Equity is created with the amount of the down payment at purchase. By rule, only these mortgages are eligible for amortization of longer than 25 years.

An amortization period of more than 25 years is not a new idea. However, it is more prevalent lately than it has ever been. Of note, new low-ratio mortgages of greater than 25 years make up 60% of this type of mortgage in Canada. While growth in popularity is apparent, these longer amortization periods are not available at every bank or prime lender. For those interested in a longer period, some legwork may be required to find a lender that provides these mortgages.

The draw to these 30-year mortgages is obvious: lower monthly payments. The negatives should be just as apparent, however. While the average 30-year mortgage payment is ten percent lower than a 25-year payment, the homeowner will spend twenty percent more in interest over the lifespan of the mortgage. This is something to consider when weighing the importance of lower monthly payments.

There are two main reasons that the longer amortization periods are gaining traction amongst Canadian home buyers and mortgage holders. First, the seemingly drastic rise in home values partnered with a less significant rise in incomes is driving buyers to seek lower monthly payments that fit their budgets. Lower incomes also make qualifying for a 25-year mortgage more difficult.

Secondly, the trend of spending beyond budgetary constraints is continuing to grow, despite the negative long-term outlook of such behavior. There are many contributors to this phenomenon including access to shopping (online), student loan debt, and high living costs. All of these factors convince Canadians that debt is a fact of life and finding a way to squeeze more out of the budget rather than cut unnecessary expenditures have become normal practice.

There are certainly reasonable scenarios that lead homebuyers to seek out a longer than typical amortization period. However, it is not necessarily the best idea for everyone. Simply seeking a way to be able to spend frivolously is probably not the best reason to attain a longer amortization period. 

If you received a lump sum to put toward a down payment and have lower income, have seen a sudden life change and racked up debt, or experience changes in income based on your type of employment, a 30-year amortization might be right for you. 

Fortunately, you can have it both ways. Seeking a 30-year amortization to make your budget work at first does not mean you must stay on that path. When your mortgage renewal comes around, the time period can be changed. When deciding the right amortization period is right for your mortgage, it all comes down to how much you want to, or can, spend now versus later.