Is a 30-year Mortgage The Right Choice For You?
Extending the term of your mortgage can increase the loan amount you are eligible for and offer flexibility in your financial plan. Discover how to determine if a 30-year home loan is the best fit for your needs.
Opting for a 30-year mortgage plan in Canada may appeal to homebuyers grappling with the unyielding real estate rates.
Given the current price levels, numerous purchasers are burdened with mortgage payments that surpass their comfortable affordability despite opting for a 25-year mortgage. However, by choosing a 30-year mortgage, buyers can push the boundaries of their eligibility and establish additional flexibility in their budget through reduced mortgage payments.
However, how does procuring a 30-year mortgage impact homebuyers? We will dissect it in detail below.
25- Versus 30-Year Mortgages
A 30-year mortgage operates differently from other mortgage products, such as those with a 25-year amortization period. The primary distinction is, of course, the length of the amortization. However, you may also need to go through more rounds of mortgage renewals. The period during which your mortgage contract is valid is known as a “term.” While terms can range from a few months to several years, they are typically not longer than 10 years. This implies you must renew your mortgage multiple times before the amortization period ends.
Mortgages that are spread out over a period of 30 years are subject to distinct regulations regarding the down payment. All 30-year mortgages fall under the category of low-ratio mortgages, which implies that a buyer must provide a down payment of at least 20% to secure one (mortgages acquired with less than a 20% down payment are referred to as high-ratio mortgages). The minimum down payment required for 25-year mortgages varies based on the property’s price; there is no strict 20% rule, but the borrower must still fulfill Canada’s other down payment criteria. This implies that for homes priced under $500,000, you may be obligated to provide a down payment as low as 5%. In contrast, for properties valued at $1 million or more, the down payment requirement could be as high as 20%.
To secure mortgage default insurance from the Canada Mortgage and Housing Corporation (CMHC), buyers are required to have a mortgage term of 25 years or less. This insurance is an additional fee that is charged to protect mortgage lenders from the risk of default. It is important to note that CMHC does not insure mortgages with a term of 30 years, which can impact the mortgage’s interest rate. Further details on this topic are discussed below.
Advantages and Disadvantages of Opting for a 30-Year Mortgage
Enrolling in a 30-year mortgage plan provides homebuyers with the benefit of extending their mortgage payments over a more extended period. Verceles explains that by selecting this option, you can spread your debt over five additional years compared to a 25-year mortgage. This feature is particularly useful in significant markets where higher purchase prices or mortgage amounts are required to secure a property.
Assuming the average Canadian home price is $748,450, a buyer who decides to put down 20% and takes a 30-year mortgage at a fixed rate of 2.69% will be paying $2,421 monthly for their mortgage. You can use a mortgage payment calculator to verify this information. However, if another buyer with the same down payment and mortgage terms chooses a 25-year amortization, they will pay $2,739 monthly. This means the second buyer will pay $318 more monthly than the first buyer, which amounts to an extra $3,816 annually.
Upon initial inspection, opting for a 30-year mortgage may appear to be the more favourable decision. However, it’s important to note that the buyer would ultimately shell out a whopping $272,684 in interest throughout the mortgage’s lifespan. Alternatively, selecting a 25-year mortgage would result in a total interest payment of $223,008, a significant savings of $49,676 compared to the same mortgage principal.
Obtaining insurance from the CMHC for a 30-year mortgage is impossible in Canada, implying that a minimum down payment of 20% is mandatory. Consequently, this requirement can pose challenges in acquiring the desired home. For instance, if you wish to purchase a house worth $748,450, a 15% down payment would amount to $112,268. However, if you were to meet the 20% down payment threshold, the amount would increase to $149,690. Consequently, an additional $37,422 must be accessed to fulfill this requirement.
Furthermore, borrowers who opt for CMHC-insured mortgages may receive more favourable interest rates from lenders. This is because the lender is not solely responsible for the potential financial losses resulting from a borrower’s inability to repay the loan. On average, these preferential rates can translate to a 0.25% interest reduction.
Is it Possible to Obtain a Mortgage That Extends Beyond the Traditional 30-year Term?
In several nations, like Japan, it is not uncommon to find mortgages with durations of 35, 40, and even 100 years. These extended mortgage terms are designed to be repaid over multiple generations.
In the past, Canadian banks used to provide mortgages with a term of 40 years. However, this practice ended when the housing bubble in North America burst in 2008. In response to the financial crisis, the Department of Finance reduced the maximum amortization period to 35 years. Later on, they further decreased it to 30 years. The reason behind this decision was to prevent individuals from taking on excessive debt. Despite these changes, some alternative lenders still offer mortgages with terms of 35 or even 40 years. However, it is essential to note that these mortgages come with higher interest rates than shorter-term mortgages provided by traditional banks.
Is a 30-Year Mortgage the Right Choice For You?
If you’re a Canadian looking to buy a home in a highly competitive market, opting for a 30-year mortgage might be a wise decision to secure a more expensive property and save money on regular mortgage payments. However, this may result in paying a significant amount in interest over the loan’s lifespan. Your financial situation and objectives will determine whether a 30-year mortgage suits you.