Canada increasing its amortization period for mortgages can have both advantages and disadvantages, depending on individual circumstances and market conditions.
According to Globe and Mail’s Carrick, of all the measures the housing measures federal government has announced lately, the one with the most immediate impact will be expanding the availability of 30-year mortgages.
Starting Aug. 1, 2024 first-time buyers purchasing newly built homes with a down payment of less than 20% will be able to amortize their mortgages over 30 years, up from the current 25 years. If you put down 20% or more on a mortgage, and thus don’t need mortgage default insurance, you can already amortize over 30 years.
Here’s a breakdown of the potential pros and cons of a 30-year mortgage:
Extending the amortization period can result in lower monthly mortgage payments. By spreading the repayment of the loan over a longer period, borrowers can reduce the amount they need to pay each month, which may improve affordability, particularly for first-time homebuyers or those with tight budgets.
With lower monthly payments, homebuyers may be able to qualify for a larger mortgage amount, allowing them to purchase a more expensive home or afford properties in higher-priced markets. This can expand homeownership opportunities for individuals who may have otherwise been priced out of the market.
A longer amortization period can provide borrowers with greater flexibility in managing their cash flow. Lower monthly payments may free up funds for other financial priorities, such as saving for retirement, education, or emergencies, providing a buffer against unexpected expenses.
While extending the amortization period reduces monthly payments, it also means borrowers will pay more interest over the life of the loan. This can result in significantly higher total interest costs compared to shorter-term mortgages, potentially negating the initial affordability benefits.
A longer amortization period means borrowers will be in debt for a longer period of time. This can delay debt repayment and increase the overall financial burden, especially for borrowers nearing retirement age or those who prefer to pay off their mortgage sooner to achieve debt-free homeownership.
Extending the amortization period can expose borrowers to greater risks associated with fluctuations in interest rates and housing market conditions. While lower monthly payments may be manageable in the short term, borrowers may face challenges if interest rates rise or property values decline, potentially leading to negative equity or financial strain.
Ultimately, whether extending the amortization period is worth it depends on individual financial goals, risk tolerance, and affordability considerations. Borrowers should carefully weigh the pros and cons, consider their long-term financial outlook, and seek advice from mortgage professionals or financial advisors to make an informed decision.
