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Longer mortgages can stretch the amount you qualify for and provide some wiggle room in your budget. Here’s how to know if a 30-year mortgage is suitable for you.
Signing a 30-year mortgage in Canada can be an attractive option for some home buyers in the face of relentless real estate prices and historically high interest rates. Specifically first-time home buyers and those now renewing their mortgages.
While prices in Toronto have fallen slightly, with an average selling price of $1.16 million in May 2024, according to figures from the Toronto Regional Real Estate Board, they remain significantly higher than they were pre-2020. In some cities, like Vancouver, home prices continue to go up. The benchmark price for all Vancouver residential properties was $1.2 million, according to the Canadian Real Estate Association, a 2.3% increase over the previous year.
Historically high interest rates are still taking a toll on Canadian homebuyers, even as the Bank of Canada (BoC) cautiously suggests rate cuts are on the horizon. Anyone who signed a mortgage a year ago is locked into a rate that is far higher than those seen in 2020, while roughly 3.4 million mortgages are set to renew in 2025 alone.
In conditions like these, many buyers face mortgage payments that exceed what they can comfortably afford, even with a 25-year mortgage. By taking out a 30-year mortgage, buyers can stretch the limits of what they’re able to qualify for and create some extra wiggle room in their budget through smaller mortgage payments.
“With the cost of everything, and the rising interest rates, I am seeing my clients have a tougher time,” says Micah Verceles, a Vancouver-based mortgage broker. “Extending a mortgage would alleviate some pain on a month-to-month basis, depending on the mortgage size.”
But what does getting a 30-year mortgage actually mean for home buyers in Canada? We break it down below.
As of August 1, 2024, first-time home buyers looking to buy can consider the 30-year term with a down payment that’s less than 20%. Under certain conditions, of course. The home must be a new build and valued less than $1-million. And more changes are coming in December 2024. (For more details, read: “New mortgage changes for 2024: Wider access to 30-year mortgages and more”)
A 30-year mortgage works a little differently than other mortgages, including those with 25-year amortizations (the number of years it will take to pay off the loan). The principal difference is, of course, the length of the amortization, but you might also be in for more rounds of mortgage renewals. The amount of time to pay back the loan outlined in your mortgage contract is in effect is called a “term.” Terms can vary from a few months to several years, but they typically won’t be longer than 10 years. This means you will have to renew your mortgage several times before the amortization is up.
Mortgages amortized over 30 years are subject to different down payment rules than that of other terms. Most 30-year mortgages are “low-ratio mortgages,” meaning a buyer must have a down payment of at least 20% to obtain one. (Mortgages obtained with less than a 20% down payment are called high-ratio mortgages). The minimum down payment needed for 25-year mortgages depends on the price of the home; there is no strict 20% rule, but the borrower must still meet Canada’s other down payment requirements. That means you might be required to have a down payment of as low as 5%, for homes under $500,000, and as high as 20%, for homes valued at $1 million or more.
Finally, buyers must have a mortgage or 25 years or less in order to obtain mortgage default insurance from the Canada Mortgage and Housing Corporation (CMHC)—an added fee used to protect mortgage lenders from default. However, 30-year mortgages cannot be insured by CMHC, which can impact the interest rate on your mortgage, as we explain below.
What to see the difference in a 25-year versus 30 year mortgage? Tap the filter icon on the far right to expand the data fields. Change the amortization to 25-year or 30-year mortgage (second from the right, second row).
Signing up for a 30-year mortgage allows a buyer to stretch their mortgage payments over a longer period of time. “You’re spreading your debt over five extra years [compared to 25-year mortgages]. That usually gets you a higher purchase price or mortgage amount that’s needed in the big markets,” explains Verceles.
On a home selling for $699,117 (the average Canadian home price as of May 2024), a buyer who puts 20% down and takes out a 30-year mortgage at a five-year fixed rate of 4.99% will pay $2,982 a month on their mortgage. (You can run the calculations yourself using a mortgage payment calculator.) Another buyer with the same down payment and mortgage terms but a 25-year amortization would shell out $3,250—that’s $268 more than the first buyer every month, or an extra $3,216 a year.
At first glance, the 30-year mortgage seems like the better choice—except that the buyer would end up paying a total of $514,068 in interest over the life of the mortgage, assuming rates did not change. The 25-year mortgage buyer, on the other hand, would pay $415,615 in total interest—a difference of $98,415 on the same mortgage principal.
In Canada, a 30-year mortgage is not insurable through the CMHC, meaning a minimum 20% down payment is required, unless it is for a new build as outlined above. Even with the new change around 30-year mortgages, this can make it more difficult to purchase the home that you want. A 15% down payment on a $748,450 house is $112,268. At 20%, the down payment jumps to $149,690—meaning you will need to access $37,422 more.
Plus, Verceles says, mortgage lenders tend to give borrowers slightly better rates for mortgages covered through CMHC insurance, because the lender isn’t the one shouldering the risks of a default. Usually, those savings can amount to a quarter of a percent in interest, according to Verceles.
In some countries, such as Japan, mortgages with terms of 35, 40 and even 100 years are not unheard of. The long term mortgages are intended to be paid over multiple generations. Canada’s major lenders once offered 40-year mortgages, but that ended when the North American housing bubble burst in 2008. Shortly after that meltdown, Canada’s Department of Finance decreased the maximum amortization to 35 years, then later reduced it to 30 years.
“They don’t want people to leverage themselves too far,” Verceles explains. (Some alternative lenders still offer 35- and even 40-year mortgages, albeit with steeper interest rates than a shorter mortgage from a bank.)
Widespread concern about housing affordability in Canada have made the idea of longer amortization periods more attractive to homebuyers, but Verceles says he isn’t sure whether the Canadian government will loosen rules to allow 30-plus-year amortizations again. But given the importance of real estate to Canada’s economy, it’s possible that the federal government may to ease the financial burden of homebuyers by letting them spread out their payments over a longer period of time.
For Canadian buyers trying to purchase homes in hot markets, a 30-year mortgage might be the best way to qualify for a pricier home and to save money on regular mortgage payments. However, those short-term gains come at the cost of paying a lot more in interest over the life of the loan. Whether or not a 30-year mortgage is right for you ultimately depends on your financial situation and goals.
For Canadian buyers (first-time buyers included) trying to purchase homes in hot markets, a 30-year mortgage might be the best way to qualify for a pricier home and to save money on regular mortgage payments. However, those short-term gains can come at the cost of paying a lot more in interest over the life of the loan. Whether or not a 30-year mortgage is right for you ultimately depends on your financial situation and goals.
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