Mortgage Blog

As a first-time homebuyer you can now stretch your mortgage to 30 years. But is that a good idea?

October 30, 2024 | Posted by: Angela Robinson

With Canadian home prices remaining high, homeownership feels out of reach for many prospective buyers. According to a CIBC survey, 76% of Canadians who haven't purchased a home believe they may never be able to. In response, the federal government has introduced new measures to help first-time buyers, such as the First Home Savings Account (FHSA) and extended 30-year amortizations on insured mortgages for specific buyers. But while a longer amortization can lower monthly payments, experts warn that it can carry substantial risks.

What Is a 30-Year Amortization?

An amortization period is the length of time it will take to pay off a mortgage in full. While 25 years has been the standard for many Canadian mortgages, the federal government recently extended 30-year amortizations for insured mortgages on new builds for first-time buyers who put down less than 20%. The main attraction? Monthly payments are lower, which can help new buyers qualify for a mortgage and afford ongoing payments.

But that reduction in monthly cost comes with a trade-off: you’ll pay more in interest over the life of the loan. For example, on an $800,000 mortgage with a fixed 5.5% rate, you could pay nearly $160,000 more in interest over 30 years than you would over 25 years, according to the Government of Canada’s mortgage calculator.

Why Consider Extending Your Amortization?

Lowering monthly payments with a longer amortization period can help new homeowners manage other financial obligations, and it may seem like a viable solution to overcome affordability barriers. However, extending the term can stretch out your debt servicing period, potentially taking you into retirement age.

Jason Heath, managing director at Objective Financial Partners, advises prospective homeowners to think ahead to life stages. 'In many cases, it’s nice to be entering retirement without a mortgage to worry about,' Heath says. He recommends considering other tools, such as the First Home Savings Account (FHSA), which allows first-time buyers to save up to $40,000 tax-free.

Is a 30-Year Mortgage Really Affordable?

Colin White, CEO of Verecan Capital Management, cautions that extending the amortization may create a false sense of affordability. He points out that while the immediate cost may seem manageable, the longer timeline can lead to financial stress. 'If you can’t afford a house on a 25-year amortization, extending to 30 years doesn’t mean you can afford it,' White says. 'It puts you in a position where the smallest financial incident becomes a huge emergency.'

Additionally, while most lenders allow for lump sum payments that can shorten the amortization later on, that flexibility isn’t a substitute for proper financial planning.

Exploring Other Savings Programs for Homebuyers

For Canadians looking to buy their first home, programs like the FHSA and the Home Buyer’s Plan (HBP) can provide more financially sustainable options:

• First Home Savings Account (FHSA): This account combines the benefits of an RRSP and TFSA, allowing tax-free savings up to $40,000 for first-time homebuyers.
• Home Buyer’s Plan (HBP): Under this program, you can withdraw up to $60,000 tax-free from your RRSP. However, you’ll need to repay this amount within 15 years, or it will be considered taxable income.

Final Thoughts: Weighing the Benefits and Drawbacks of a Longer Amortization

While a 30-year mortgage can make monthly payments more affordable, it’s essential to consider the long-term financial impact. Higher interest payments and prolonged debt servicing can overshadow the short-term benefits, potentially leading to financial stress. Prospective buyers should explore other savings tools like the FHSA and HBP and consult with a financial advisor to assess their options before extending their mortgage term.

Homeownership remains a goal for many Canadians, but with careful planning and a realistic view of the costs, you can make informed choices that support financial stability over the long term.

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