30-Year Insured Mortgages Have Arrived in Canada: Here’s What That Means for You as a Borrower

30-Year Insured Mortgages

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On April 11, 2024, Finance Minister Chrystia announced that the federal government will allow 30-year mortgage amortizations for first-time buyers who purchase newly built homes in Canada. The aim of this new measure, which takes effect August 1, 2024, is to make mortgage debt more affordable and encourage the development of new homes.  

If you’re an aspiring homeowner looking for financial relief amid sky-high real estate prices, a 30-year amortization could be just what you need to qualify for a mortgage. However, this lengthy loan may also cost you more over the long run, even if it feels like you’re saving money. 

In this guide, we’ll explain how a 30-year mortgage works and break down the pros and cons of applying for one. We’ll also show you how it will impact your ability to borrow money and manage your other debt obligations.

How does a 30-year mortgage work—and why are the new rules such a big deal?

Under the current rules, the longest mortgage amortization allowed in Canada for an insured mortgage is 25 years. Here’s a quick lesson about amortization and mortgage insurance:

  • Amortization refers to the time it takes to pay off your mortgage in full. In other words, your mortgage payments, composed of interest and principal, are spread out over 25 years.
  • If you make a down payment of less than 20% of your home’s purchase price, you must buy mortgage insurance. This insurance protects your lender should you default on your mortgage. You’d most likely purchase it from the Canada Mortgage and Housing Corporation (CMHC).

Once the new rules kick in, lenders can issue 30-year insured mortgages to first-time homebuyers who put down less than 20% on a new home. This is a significant change because, in the past, you’d need to contribute a down payment higher than 20% to qualify for a 30-year mortgage. In addition, the lender would assign you a higher interest rate since the lack of mortgage insurance increases their risk. 

The combination of a larger down payment and higher interest rates meant that getting approved for a 30-year mortgage was challenging, if not impossible, for many households. However, since insured mortgages can now have 30-year amortization schedules, they’ll become more accessible. Thanks to the insurance securing the loan, lenders can now accept down payments lower than 20% and offer cheaper interest rates to borrowers.

The pros of 30-year mortgages

Lower monthly payments

The key selling point of a 30-year mortgage is affordability. With a longer amortization period, your monthly mortgage payment shrinks. Stretching out your mortgage over an additional five years can have a considerable impact on how much you pay. Let’s take a look at an example to illustrate this point. 

Assume you purchase a home for $675,000 with a 15% down payment, meaning you need to obtain a mortgage for $573,750. You decide to go for a five-year fixed-rate mortgage and qualify for an interest rate of 5.6%. Here’s how much your monthly payment would be under a 25-year amortization period and a 30-year amortization period:

 25-Year Mortgage30-Year Mortgage
Monthly Payment$3,545$3,271

As you can see, a 30-year mortgage will lower your monthly payment by $274. That means more breathing room in your budget and greater flexibility to meet your financial goals. You can use the extra money to cover household expenses, invest in your RRSP or TFSA, build an emergency fund, pay down credit card debt, take an extended vacation, etc. 

Option to purchase a more expensive home

Another benefit of a 30-year mortgage is that it might help you qualify for a larger mortgage, which means you can spend more on your home purchase. A property that once seemed out of reach financially suddenly becomes more affordable. From the lender’s perspective, lower mortgage payments reduce your risk of default, so you may be eligible for more financing. 

The cons of 30-year mortgages

Higher interest costs

The increased interest cost is the primary drawback of choosing a 30-year mortgage amortization. Since your mortgage is longer, there’s more time for interest to collect on your balance. While you won’t feel the impact when making your payments month to month, the math shows that you could lose more money over the long run.

Let’s use our previous example of purchasing a home for $675,000 with a 15% down payment. Here’s how much interest you’d pay over the life of a mortgage that lasts 25 years versus one that lasts 30 years:

 25-Year Mortgage30-Year Mortgage
Total Interest Paid$486,927$603,657
Total Mortgage Cost$1,060,677$1,177,407

By choosing a 30-year mortgage, you’d pay an extra $116,730 in interest. So, while your payments are more manageable, you spend more to service your mortgage over the long run. That’s money that you could use to pay down high-interest debt, put toward your children’s college fund, or invest in various assets to grow your wealth. 

Longer time to pay off your mortgage

It’ll take you longer to pay off a 30-year mortgage. Yes, you benefit from smaller payments, which relieves some financial stress. But three decades is a long time to free yourself from what’s likely the most significant monthly expense you’ll undertake. By the time your balance reaches zero you could be close to retirement. And if you’re still chipping away at your mortgage when you’re in your 60s, you’ll have less money available to enjoy your golden years. 

Home equity builds up slowly

An often overlooked drawback of 30-year mortgages is the slower pace at which you build home equity. Since your mortgage is spread over a longer time frame, there’s more time for interest to accumulate. As a result, a larger chunk of your monthly payments will go toward interest rather than principal. If you decide to sell your home after a few years, you’ll earn a smaller profit overall.

Having low home equity also restricts your ability to borrow against your property or refinance your mortgage. Lenders have minimum home equity requirements you must meet to qualify for HELOCs, home equity loans, and mortgage refinancing (more on this later). And it’s harder to do that with a 30-year mortgage.

How a 30-year mortgage impacts your ability to borrow, spend, and manage debt

Here’s how a 30-year mortgage can affect your household’s debt management, budgeting, and spending.

More income available to pay down other debts

Lower monthly mortgage payments free up more cash that you can put toward expensive debts, including credit cards and unsecured lines of credit. This is a positive outcome, as these types of debt can spiral out of control quickly due to the high interest rates they charge.

Greater capacity to take on extra debt

With reduced mortgage payments, you’ll have more room in your budget to apply to take on extra debt, perhaps a car loan to help finance a much-needed vehicle purchase. From lenders’ perspective your debt-to-income ratio will be lower, putting you less at risk for missing payments.

More income available for discretionary spending

No one will argue that having more spare cash is a bad thing. And that’s one of the advantages of getting a 30-year mortgage.

However, it won’t do you any good if you engage in reckless spending. So ensure you have a budget in place and always pay your bills on time. Otherwise, you’ll find yourself relying on credit to bail you our whenever you overspend, which you can lead to debt problems.

Less capacity to leverage home equity

As alluded to earlier, your home equity will increase more slowly under a 30-year mortgage than one that lasts 25 years. That means you’ll have fewer options for refinancing or borrowing money against your home equity

For example, in Canada, you can only borrow up to 65% of your home’s value, less the outstanding mortgage on a home equity line of credit (HELOC)

Similarly, suppose you want to refinance your mortgage at a lower interest rate. In that case, you’ll need at least 20% equity in your home to be eligible under most lenders’ standards. These requirements also apply if you want to consolidate your debt through a cash-out refinance. Hitting that 20% mark will take longer under a 30-year amortization schedule. 

The other danger of low home equity is that it can get wiped out much faster. If the Canadian real estate market suffers a massive decline, you could be left with an underwater mortgage.

How 30-year mortgages could potentially cause mortgage payments to rise instead of drop

Some experts have warned that the federal government’s plan to ease the financial burden for Canadians via 30-year mortgages may backfire. For example, Daren King, an economist at the National Bank of Canada, issued the following statement to BNN Bloomberg:

“The payment bottom line will be better for those people. That’s good news. But if you’re not improving the supply issues that we’re having, then you’ll just drive prices upward and that won’t solve the affordability issue in the medium to long run.”

Luckily, the federal government has plans to encourage the construction of new homes, which may help keep prices in check. However, if demand for homes continues to outpace supply, there may be no financial advantage to getting a 30-year mortgage. In fact, you could end up paying more than if you opted for the traditional 25-year amortization period.

Should you get a 30-year mortgage as a first-time home buyer?

There are advantages and disadvantages to getting a 30-year insured mortgage, so there’s no right or wrong answer to this question. 

What’s important is understanding how this type of mortgage will impact your household’s financial situation. You need to crunch the numbers to see if it makes sense to get one and under what conditions. 

Ultimately, it comes down to whether you prefer to save money on your mortgage payments in the short run or save money on the total cost of your mortgage over the long run. You have to decide which option works best for your personal and financial goals and your lifestyle. A mortgage broker can help you evaluate both and find a mortgage best suited for your needs.

While they offer financial relief when it comes to monthly payments, 30-year mortgages will keep you in debt longer and cost you more in interest over the long run. For that reason, it’s vital to make a plan for dealing with other debts you may owe, primarily those that charge high interest rates, such as credit cards. To learn more about debt management strategies and how to take charge of your money, visit our blog.

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