With the federal government’s recent move to allow 30-year mortgage amortizations for first-time buyers of newly-built homes, and plans to expand the rule to all new builds in December, experts are raising concerns about the long-term financial impact.
Marc Nixon, Vice-President of Commercial Mortgages at TN Financial Group, warns that while longer amortization periods lower monthly payments, they significantly increase the total interest paid over the life of the mortgage. He likens the 30-year plan to a financial trap.
“The banks are going to make a killing,” Nixon said, explaining that the extended timeline could have homebuyers working well past retirement age. “It means you’ve basically increased your retirement age from 65 years old to 70.”
Nixon’s warning comes as many Canadians are purchasing their first home later in life, around age 40. The additional five years on a mortgage, he cautions, could mean delaying retirement plans.
A Double-Edged Sword for Homebuyers
The federal government’s decision to extend amortization periods is part of a broader strategy to make housing more accessible to young Canadians and first-time buyers. “It’s about making that first home more available for young Canadians,” Finance Minister Chrystia Freeland said in September.
While longer mortgages provide relief by reducing monthly payments, they come at a cost. Nixon provided an example to illustrate the financial impact for a $950,000 mortgage with a 4.5% interest rate:
- 20-year amortization: Approximately $6,010 in monthly payments and $492,441 in total interest
- 25-year amortization: Approximately $5,280 in monthly payments and $634,123 in total interest
- 30-year amortization: Approximately $4,814 in monthly payments and $782,864 in total interest
Switching from a 25-year to a 30-year amortization saves $466 per month but results in an additional $148,471 in interest over the life of the loan.
Ron Butler, a mortgage broker with Butler Mortgages, agrees that the extended amortization plan is not ideal but sees it as a necessary concession in the current market. “To give the slightest chance to young people you need to give them a 30-year amortization,” he said, while acknowledging the substantial extra interest that comes with it.
Advocating for Tax Reforms
Nixon also suggested that Canada could take a page from the U.S. tax system, where homeowners can deduct mortgage interest payments from their taxable income. He believes that adopting a similar policy in Canada could ease the financial burden on homebuyers.
“I mean they do it in the U.S., I don’t know why they are not doing it in Canada,” Nixon said. “It’s getting so unaffordable, it’s discouraging for our young people.”
Making Extra Payments to Minimize Costs
For those opting for a 30-year mortgage, experts recommend making additional payments whenever possible to reduce the overall balance and interest charges. While longer amortizations may provide initial breathing room, the key to minimizing financial strain is careful planning and disciplined payments over time.