30-Year Mortgages in Canada

A 30-year mortgage is a home loan that is repaid over a period of 30 years. It will still have shorter term lengths, such as one to five-year terms, rather than a term length of 30 years. This extended amortization period, longer than the typical 25 years, can make monthly payments more manageable, which is why many people find it appealing. But how does a 30-year mortgage differ from other options, such as a 25-year mortgage?

Longer mortgages over 25-year amortizations became increasingly more popular due to growing mortgage affordability issues after a series of rate hikes in 2022 and 2023. By the end of 2023, 62.7% of mortgages in Canada had an amortization of 25 years, while only 37.3% had an amortization of 25 years or less, according to the CMHC residential mortgage industry report. That’s because 30-year and longer mortgage amortizations offer lower monthly payments, but at the cost of higher lifetime interest.

For example, on a $500,000 mortgage at a 5% interest rate, a 25-year mortgage would have monthly payments of $2,908, while a 30-year mortgage with a 5% interest rate would reduce this to $2,668. However, the total interest paid over the life of the loan would be $88,236 more with the 30-year mortgage.

One thing to keep in mind is that mortgages with a 25-year amortization are insurable, while 30-year mortgages are not insurable. Having an uninsurable mortgage usually results in a higher interest rate compared to insured mortgage rates, which will counteract lower mortgage payments from it being spread out over a longer period. On the flipside, an insured mortgage borrowers will have to pay a mortgage default insurance premium, which is a percentage of the borrowed amount.

It’s important to run the numbers to see whether or not a 30-year mortgage is right for you. A mortgage amortization calculator can be used to test out different scenarios. Let’s look at a $500,000 mortgage and compare mortgage payments and interest for an insured 25-year vs. an uninsurable 30-year mortgage, assuming that everything besides the amortization period is the same.

Lower Monthly Payments

With a 30-year mortgage, your monthly payment is $240 lower than a 25-year mortgage, offering more immediate financial relief.

Higher Lifetime Interest

In contrast, you'll pay $88,236 more in interest over the life of a 30-year mortgage compared to a 25-year mortgage. While the monthly payment is 8% lower, the lifetime interest cost is 24% higher.

Smaller Monthly Payments

One of the most significant advantages of a 30-year mortgage is the reduced monthly payment. This can provide you with extra cash flow. Paying less money each month frees up your money for other things, such as investing in the stock market or making home renovations that add value to your home.

Increased Purchasing Power

When you get a mortgage in Canada, lenders determine your mortgage eligibility by looking at your debt service ratios. The two main ratios, gross debt service (GDS) and total debt service (TDS), look at how your income compares to your debt and other monthly payments. Another factor is the stress test, which determines if you can still afford your mortgage payments if interest rates rise.

Lower monthly payments improve your debt service ratios, making qualifying for a larger mortgage easier. This can be particularly beneficial if you're looking to buy a more expensive property. That’s because your debt service ratios and your total monthly expenses will be lowered when you spread out your mortgage payments over a longer period. This increases your purchasing power.

More Flexibility

It’s easier to have a longer amortization and make prepayments when convenient than to have a shorter amortization and need to extend it. If you want to pay off your mortgage faster, a longer amortization provides the flexibility to make prepayments when you have extra cash. This can help you pay off your mortgage faster without being locked into higher monthly payments.

Since all 30-year mortgages are uninsured, you won’t be limited by CMHC rules for insured mortgages. This means you won’t be capped to a $1 million purchase price limit.

Higher Interest Costs

The most significant drawback is the higher total interest paid over the life of the loan. Longer amortization means paying interest for a more extended period, resulting in higher costs.

Although your monthly payments will be smaller, they will add up to a larger total amount of money paid over the life of the loan. That’s because interest is charged on the unpaid principal balance of your loan, and the longer it takes to pay off the loan, the more interest you will pay.

Higher Interest Rates

Uninsurable 30-year mortgages often come with higher interest rates compared to insured or insurable mortgages with an amortization of 25 years or less. This further increases the overall cost of the mortgage.

One reason for this is that 30-year mortgages are uninsurable. In comparison, high-ratio mortgages, which are those that have a mortgage down payment of less than 20% and are insured, usually have the lowest mortgage rates but are only allowed up to a 25-year amortization. Insured mortgages also require other conditions, such as the home purchase price needing to be lower than $1 million. Insured mortgages reduce the risk for mortgage lenders, allowing them to offer lower rates. You’ll often see 30-year mortgage rates being higher, even with all else being equal.

Slower Equity Growth

It will take you longer to build equity in your home as your mortgage principal will take longer to be paid down. This can be a disadvantage if you need to sell or refinance before the mortgage term ends.

Given the pros and cons, why would someone opt for a 30-year mortgage? The primary reason is affordability.

Affordability

Lower monthly payments can make homeownership more accessible, especially for first-time buyers. This increased affordability can make it easier to manage your finances and meet other financial goals.

Flexibility in Financial Planning

The flexibility to make prepayments allows you to adjust your mortgage based on your financial situation. If you come into extra cash, you can make lump-sum payments to reduce your principal faster.

Long-term Investment

Lower monthly payments free up money for other investments, potentially yielding higher returns over the long term. This can be a strategic move for those looking to diversify their financial portfolio.

What is the difference between a 25-year and a 30-year mortgage?

A 25-year mortgage has a shorter repayment period, resulting in higher monthly payments but lower total interest costs. Conversely, a 30-year mortgage has lower monthly payments, offering immediate financial relief but at the expense of paying more interest over the life of the loan.

How can I decide between a 25-year and a 30-year mortgage?

Consider your financial goals and current financial situation. If you prioritize lower monthly payments and greater financial flexibility, a 30-year mortgage may be a good choice. However, if you want to minimize total interest costs and build equity faster, a 25-year mortgage might be the better option.

Are there prepayment penalties with a 30-year mortgage?

This depends on your mortgage agreement and type of mortgage, such as if it is a closed or open mortgage. Some lenders may charge prepayment penalties, while others allow you to make extra payments without any fees. Review the terms and conditions of your mortgage agreement to know how much you can prepay each year. Canadian lenders typically allow annual prepayment privileges ranging from 10% to 20% of the initial mortgage principal balance.

Can I switch from a 30-year mortgage to a 25-year mortgage in the future?

You can switch from a 30-year mortgage to a 25-year mortgage through refinancing. Refinancing can shorten your repayment period and potentially lower your interest rate, but it is important to consider the costs involved in the refinancing process. You can also shorten your mortgage amortization by prepaying some of the principal when renewing your mortgage.

Does a longer mortgage amortization mean paying more in interest?

Yes, a longer mortgage amortization, like a 30-year mortgage, generally means you will pay more in interest over the life of the loan compared to a shorter amortization period, like a 25-year mortgage.

How can I reduce the interest costs on my 30-year mortgage?

You can reduce the interest costs on a 30-year mortgage by making extra payments towards the principal or refinancing to a lower interest rate. These strategies can help lower your total interest payments and/or shorten the mortgage amortization.

What are the typical interest rates for 30-year mortgages compared to shorter terms?

Typically, uninsurable 30-year mortgages have higher interest rates than insured or insurable mortgages with an amortization of 25 years or less. That’s because insured and insurable mortgages can have a maximum amortization period of 25 years. Most regulated mortgage lenders can cheaply fund insured or insurable mortgages while only big banks can cheaply fund uninsurable mortgages.

Is a 30-year mortgage a good choice for first-time homebuyers?

A 30-year mortgage can benefit first-time homebuyers due to its lower monthly payments, making homeownership more accessible. This is one of the reasons why the federal government raised the limit on CMHC’s rules, allowing first-time home buyers to get an insured mortgage with an amortization of up to 30 years when buying a newly built home. However, it is important to weigh the long-term cost implications and see how it fits within your overall financial plan.

How does inflation affect a 30-year mortgage?

Inflation can erode the real value of your fixed monthly mortgage payments over time, effectively making them cheaper. However, if inflation leads to higher interest rates, the cost of borrowing for future mortgage terms could increase.

Can I get a longer mortgage?

Yes, you can potentially get a longer mortgage, such as a 35-year mortgage or even 40-year mortgage. However, it's important to carefully consider the implications of such a long-term commitment and how it aligns with your financial goals. Longer mortgages may offer lower monthly payments but also result in higher total interest costs and slower equity growth over time. It may even result in you continuing to have a mortgage during retirement, which can be an issue for those on a fixed income and relying on benefits such as Old Age Security (OAS).