30-year amortizations are now offered on insured mortgages in Canada

By: Arshi Hossain on July 30, 2024

The federal government announced in its budget that starting August 1, 2024, they would change insured mortgage rules to allow up to 30-year mortgages for first-time homebuyers purchasing new builds in efforts to lower monthly mortgage payments.

This measure aims to make homeownership more accessible for younger Canadians while promoting new housing supply.

If you’re a potential first-time homebuyer, what does this mean for you?

Understanding mortgage term and amortization

When you get a mortgage in Canada, there are two important timelines that determine how much you pay in interest on your monthly payment:

Mortgage term: The mortgage term is the duration of your mortgage contract. Mortgage terms are typically between one year and five years, and throughout this period, you’re expected to follow the terms of your mortgage without seeking a new interest rate or switching your mortgage type. Remember, variable rates fluctuate. Mortgage terms refer to the periods between when you can make changes to your mortgage.

Mortgage amortization: The amortization period is the total time it takes to pay off your mortgage in full. The standard amortization in Canada for insured mortgages is usually 25 years (25-year mortgages already exist for uninsured mortgages). With a 30-year mortgage, you’ll have a longer repayment period, which results in slightly lower monthly payments compared to a 25-year mortgage.

Who is eligible for 30-year mortgages, and what are the parameters?

At least one borrower on the mortgage application must be a first-time homebuyer. This includes those who:

have never owned a home before, or
haven’t occupied a home they or their current spouse/common-law partner owned in the last 4 years.

In order for the extended amortization to apply, the property being purchased must be newly constructed (never lived in before).

This opportunity applies to insured mortgages (priced below $1 million with a down payment of less than 20%).

How much money will you save by stretching your amortization?

For first-time homebuyers in Canada, the choice of mortgage amortization can significantly impact affordability.

Let’s say you’re an individual earning an annual gross income of $100,000 or in a couple with a combined household income of the same amount. Assuming a minimum down payment of 5%, here’s what you might expect to pay over the course of a 25-year vs. 30-year amortization at a five-year fixed-rate of 5%.

25-year mortgage

Maximum home price: With a 25-year mortgage, you could finance a home up to $405,000.
Monthly payment: The monthly mortgage payment for this home would be $2,327.

30-year mortgage

Maximum home price: Opting for a 30-year mortgage allows you to purchase a home priced up to $428,000.
Monthly payment: The monthly mortgage payment for this home would be $2,261.

The difference: $23,000 or $66 per month.

By stretching the amortization period from 25 to 30 years, you gain some advantages, such as:

Higher purchase price: With the 30-year option, you can afford a home that’s $23,000 more expensive.

Lower monthly payment: Despite the higher price, your monthly mortgage payment decreases by $66.

Drawbacks of extending your amortization

There are a few caveats to extending your amortization to 30 years.

You pay more in cumulative interest

Because the 30-year option comes with more individual payments, it also results in higher overall interest costs. Over the extended five-year mortgage period on the hypothetical mortgage above, the 30-year amortization accumulates an additional $7,116 in mortgage interest. Conversely, the 25-year option pays off the loan faster, reducing the total amount of interest paid.

Fewer options in certain cities

Depending on where you want to live, there may be limited inventory for homes priced under one million. Potential homebuyers will find themselves excluded in real estate markets like Toronto where the average home price is well over a million, with condos pushing $700,000 or more.

Your dollar doesn’t go as far

When you buy a brand-new home, it tends to cost more per square foot than an existing home (a resale property). This higher cost means that even though you qualify for a larger mortgage amount, your purchasing power is impacted. Essentially, your dollar doesn’t stretch as far because the cost per square foot is higher.

You may be paying more in fees

Since the mortgage must be insured, it also comes with an additional 20 basis points insurance surcharge. Depending on your province, you may also be subject to additional provincial sales tax on your mortgage insurance. Lastly, if you’re in a market where the only options available to you are new construction condos, you’ll have to budget for additional condo fees on top of the higher purchase price.

Changes to the Home Buyer's Plan

In addition to allowing extended amortizations for newly built insured homes, the federal government has also made changes to the existing Home Buyer’s Plan (HBP), a program in Canada that allows eligible individuals to withdraw funds from their Registered Retirement Savings Plan (RRSP) to use toward the purchase of their first home has some updates.

More withdrawal room: Previously, the HBP was capped at $35,000. Now, homebuyers can withdraw up to $60,000 from their RRSP to purchase a qualifying home.

Pay it back over a longer period: If you withdraw funds from your RRSP for a eligible home purchased between January 1, 2022, and December 31, 2025, you have a grace period of up to five years before you must begin repaying the money back to your RRSP, and a total of 15 years to pay off the total withdrawn amount.

This extension provides additional flexibility for new homeowners, allowing them more time to manage the high up-front costs of homeownership.

The verdict

While the 30-year amortization provides some advantages, some critics believe that it may not be the sole solution for aspiring homeowners and enough to get them into the market, especially in cities with tight supply and high home prices such as Vancouver or Toronto.

Homebuyers need to weigh affordability against long-term investment. While smaller monthly payments are attractive, paying more overall interest over 30 years may not be the right choice for you. In all cases, consult a mortgage professional when it comes to tackling this major milestone, and compare rates online to make sure you’re not paying more than you need to.

A lower interest rate may make all the difference in being able to afford your next home.

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