30-Year Mortgage: Good or Bad?

For many Canadians, your house is often the largest single purchase you will make during your lifetime. Yet, as CBC reports, the dream of home ownership remains out of reach for millions of Canadians as home prices continue to rise – up more than 30 percent since April 2020.

Recent Changes: What's New?

According to Chrystia Freeland, Canada's former Deputy Prime Minister and Minister of Finance, “One of the biggest hurdles to homeownership for younger Canadians is qualifying for a mortgage and affording the monthly payments. That is why, starting August 1st, 2024, first-time buyers of new builds will be able to reduce their monthly payments with up to 30-year mortgages.”¹

This means that, effective August 1, 2024, first-time home buyers were able to spread payments over 30 years, which is 5 years longer than the previous maximum of 25 years. The initial rule change enabled lenders to offer 30-year amortizations on insured mortgages (i.e. high-ratio mortgages where their mortgage amount is greater than 80% of the purchase price) for first-time homebuyers purchasing new builds. Subsequently, on December 15^th, 2024, the government expanded that measure to permit 30-year  amortizations to all first-time homebuyers and all buyers of new builds.

Pros and Cons

First let's ask, what's good about a 30-year amortization? Why would someone want to take 30 years to pay off their mortgage? The main reason is to lower the monthly cost – all else being equal, extending the total time to repay a mortgage lowers the monthly payment, thereby making the purchase more affordable. Since many mortgage approvals are based on cash flow, lower payments may enable the borrower to qualify for a more expensive property.

This sounds like great news, but while extending the amortization of your mortgage can indeed lower your monthly costs, it can also significantly increase your total cost of borrowing and the total amount of interest you end up paying over the duration of the mortgage. Furthermore, incurring significant debt over long periods of time can negatively impact other goals such as retirement and lifestyle.

Mortgage Math: The Cost of Borrowing

Let's consider an example of a $500,000 mortgage at 5% interest. In reality, your mortgage interest rate may change many times throughout the duration of the mortgage as you renew each term. For simplicity, however, we'll assume an interest rate of 5% throughout the entire mortgage. Here's how the numbers work for a 20-year, 25-year, and 30-year mortgage amortization:

As we can see in this scenario, choosing a 30-year mortgage instead of a 20-year mortgage means paying $2,668 instead of $3,286 each month. That difference of $618 per month is a very meaningful amount for many Canadian families. However, the lower monthly mortgage payment comes at a cost – a very steep cost. As we can see, a 30-year mortgage in this scenario results in $460,643 interest. That is, although you've only borrowed $500,000, you will have repaid $960,643 at the end of 30 years for the same property.

Bottom Line

While a 30-year amortization may make sense for some, it's important to be aware of the implications of extending a mortgage over longer periods of time. On the upside, lower monthly payments may help individuals or families purchase a house they may not otherwise afford. On the downside, some individuals may feel encouraged to purchase homes that are simply too expensive and end up burying themselves in debt for decades.

What you do depends entirely on your unique situation. Before you obtain a new mortgage, or renew an existing one, talk to your Edward Jones financial advisor about how the choices you make could impact your financial strategy.