The pros and cons of 30-year mortgages

In an effort to make housing more affordable and accessible for younger Canadians, the federal government recently eased the mortgage rules in Canada to allow eligible first-time homebuyers or buyers who are purchasing a newly-built home or condo to take out a mortgage with a 30-year amortization.

For homebuyers, there are both pros and cons to choosing a mortgage with a longer amortization period. So if you’re in the market for a new home, how can you decide if a 30-year mortgage is right for you?

25-year vs. 30-year mortgages: what’s the difference?

The amortization period of a mortgage refers to the total amount of time that a homebuyer has to pay off their mortgage loan principal and interest in full.

A 30-year amortization gives you more time to pay off your mortgage than a traditional 25- or 20-year mortgage. In most cases, because you have longer to pay, this means your monthly payments will likely be a bit lower than if you opted for a mortgage with a shorter amortization.

The trade-off, however, is that because you’re taking longer to repay the loan, you’ll generally also end up paying more in interest over the lifetime of your mortgage.

Who’s eligible?

To be eligible for a 30-year mortgage under the new rules, either the property being purchased must be a newly-constructed home, or at least one of the buyers must have either:

·       Never bought a home before;

·       Not occupied a home as their principal place of residence in the last four years that they or their spouse owned; or

·       Recently experienced a divorce or the breakdown of a common-law partnership.

Of particular interest to Vancouverites, the new rules also only apply to properties with a purchase price of $1.5 million or less.

The benefits of a longer amortization

For the vast majority of buyers, the main advantage of a 30-year amortization is the lower monthly mortgage payments you’ll have to make to your lender.

In addition to lowering your monthly bills, making smaller mortgage payments could allow you to free up more money each month to spend on things like paying off higher-interest debts, investing for your retirement, or simply enjoying a little more breathing room in your weekly household budget.

Another plus is that, because your monthly payments are smaller, you may also be able to qualify for a larger mortgage or buy a property that’s more expensive. This increase in purchasing power could especially be of interest to buyers in Canada’s most expensive markets, like Toronto and the Lower Mainland.

The disadvantages

The main disadvantage of taking longer to pay back your mortgage is, of course, that you’ll be making those lower monthly payments for five, 10 or more years longer than you would with a shorter amortization period.

Because most mortgages are structured to pay off more in interest than on the principal in the initial years, a longer loan period also means you’ll have built less equity if you decide to sell or refinance. In addition, because you’re taking longer to pay off your loan, a 30-year amortization could end up costing you thousands of dollars more in interest before your mortgage is fully paid-off, and the home is all yours.

According to an estimate by RBC, based on current interest rates, for every $150,000 you borrow, you could save around $75 a month (or $900 a year) by opting for a 30-year rather than a 25-year amortization. But by the time you pay your mortgage off, you’ll have paid close to an additional $20,000 in interest.

Which is right for you?

The bottom line is, while a 30-year mortgage could make sense for some buyers, it’s important to make sure you’re fully aware of all the personal and financial implications before you make any firm decisions.

If you’re not sure whether or not a 30-year mortgage is a good fit for you – or you just want some expert advice on your particular homebuying goals and circumstances – contact us to schedule your free consultation today.