The Pros And Cons of A 30-Year Mortgage

Unlocking the door to homeownership often involves navigating a maze of mortgage options. In the Canadian real estate landscape, where housing prices seem to defy gravity, considering a 30-year mortgage might just be the key to making your dream home a reality. While the more traditional 25-year mortgages remain the go-to choice for many Canadians, the allure of a 30-year commitment is hard to ignore.

Picture this: lower monthly payments and a financial cushion that can add a touch of flexibility to your budget. The prospect of stretching your mortgage over three decades is undoubtedly intriguing, but is it the right move for you? With the growing popularity of 30-year amortizations in Canada, before you sign on that dotted line you need to do your research. In this article, we will take a look at the advantages and potential drawbacks to help you determine whether this extended amortization option is the perfect fit for you or not.

Who Qualifies For a 30-year Mortgage in Canada?

In Canada, big banks used to provide 40-year mortgages, but that changed after the housing bubble burst in 2008. The Department of Finance made the maximum time you can take to pay off a mortgage 30 years. They did this to prevent people from borrowing too much money. Some alternative lenders still offer 35 or 40-year mortgages, but these usually come with higher interest rates compared to shorter mortgages from regular banks and common lenders.

According to Canadian lending laws, you can only apply for a 30-year mortgage if you’re making a down payment of at least 20%. That down payment threshold can make the upfront cost of 30-year mortgages simply too expensive. Getting a 30-year mortgage for a $600,000 home, for example, would require a down payment of at least $120,000 and not every home buyer today has that stack of cash ready to go.

What Are The Pros And Cons of a 30-year Mortgage?

If you can afford the down payment for a 30-year mortgage, it’s really important to know both the good and not-so-good things about these loans before you jump in with both feet.

The Pros of This Mortgage Option

• Paying less each month: If you make your mortgage last five years longer (30 years instead of 25), your monthly payment gets smaller. This not only helps you fit buying a home into your budget, but it can also make lenders more willing to approve you for a bigger loan so you can get that larger home you’ve been dreaming of. It also leaves you more wiggle room in your budget for everyday living expenses and unplanned emergencies.
• More options: Since 30-year mortgages aren’t insured, they give you more flexibility than shorter loans. With a 30-year mortgage, you might have more freedom to pay extra money and finish paying off your loan sooner. It’s kind of like having the freedom to make extra payments with an open mortgage instead of a closed one. Also, if you have a 30-year mortgage, you might be able to move it to a new home that costs more than $1 million without breaking your mortgage deal. This means you can buy a new home in the middle of your mortgage with minimal penalties.

The Cons of This Mortgage Option

• Spending more on interest: With a 30-year mortgage amortization, you might end up paying more interest for two reasons. First, since your mortgage lasts longer, you have more time to be charged interest. Second, the interest rate you get will probably be higher compared to a mortgage with a 25-year or shorter-term amortization period. This higher interest rate for a 30-year mortgage is because these loans don’t qualify for mortgage default insurance, which protects the lender if you can’t pay back the mortgage.
• Dealing with debt for a long time: Paying off debt for 30 years is a really long time, especially if you’re getting close to retirement. If you’re still paying off a 30-year mortgage when you’re 64, for example, it might mean you’re putting less money into your RRSP or TFSA than you’d like.

What’s The Difference Between a 25 And 30-Year Mortgage?

A 30-year mortgage is a bit different from other mortgages, like those with a 25-year payback period (amortization). The main difference is how long it takes to pay off the loan. With a 30-year mortgage, you might need to renew your mortgage more times because the “term” (the time your mortgage contract is in effect for) usually varies from 12 months to several years, but typically not longer than 10 years.

With these low-ratio mortgages, you need a down payment of at least 20%. On the other hand, 25-year mortgages, depending on the home price, might need a down payment as low as 5%, if it is a high-ratio mortgage. If your mortgage amortization period is 25 years or less, you can get mortgage default insurance from the Canada Mortgage and Housing Corporation (CMHC), but 30-year mortgages aren’t eligible, which can affect the interest rate you get on your mortgage.

Be Sure To Review Your Financial Outlook Before You Consider A 30-Year Mortgage

When you’re considering a 30-year mortgage amortization, you will have to look at your budget over a longer period of time. As a financial advisor and mortgage expert, I can help you review your long-term plans taking into account your family life goals and earning potential. I can also offer you the best interest rates and more options than the banks have on hand.

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Call me at (705) 315-0516, or click this link to set up a virtual meeting with me, and let’s run the numbers and chat about your options. We’ll go over the different rates, amortization period options, mortgage terms, and down payment requirements. Then we’ll find you the most favourable interest rates, and examine your long-term financial goals to see if a 30-year mortgage makes sense for you. Don’t go it alone, I can offer you free mortgage advice to make your decision easier!