Extending a mortgage by five years will lower Canadians’ monthly housing costs by a few hundred dollars but cost them six figures in the long run.
The promise made by the Liberals in the 2024 federal budget to offer Canadians 30-year mortgage amortizations will come into effect for certain homebuyers on Thursday.
Lenders can begin offering 30-year mortgage amortizations to first-time homebuyers purchasing new builds starting Aug. 1.
“Extending amortizations by up to five years will allow for lower monthly payments — helping more young Canadians unlock the door to their first home, while also incentivizing the construction of more new homes,” said the Liberals in a press release.
Economist and Macdonald-Laurier Institute fellow Jack Mintz told True North that a longer-term mortgage could help with affordability limits imposed by regulation.
“There is also risk involved with interest rates and house prices changing over time. One can get stuck with the 30-year mortgage when needing to sell a house,” said Mintz.
In June 2024, the average house in Canada cost $696,179, according to the Canadian Real Estate Association. The most expensive housing was found in British Columbia, with an average cost of $998,721 per home. Canada’s cheapest housing was found in Newfoundland and Labrador, where an average home cost $293,700.
Mintz said that because the new amortization will only be applicable to first-time homebuyers, he is not sure that it will affect demand or prices in any notable way.
For a 30-year mortgage, the monthly cost of the average home in Canada would fall to $3,477 per month, compared to $3,789 for the same home with a 25-year mortgage. However, the total cost would rise from $1,136,853 to $1,251,835, an increase of almost $115,000.
The 30-year amortization would see Canadians pay the same $651,561 in principal, after deducting the minimum possible down payment from the housing cost, but $600,274 in total interest, compared to $485,292 paid in interest throughout a 25-year mortgage amortization.
Saving just over $300 a month would cost Canadians $115,000 over the full realization of their mortgage. The cost would be greater for any home that exceeds the average cost of a home in Canada. All of the calculations assume a 5% interest rate throughout the full mortage term.
Mintz said that prospective buyers should only consider a 30-year amortization if they have no other choice to keep up with affordability limits. He offered an alternative that the feds could take to address housing affordability.
“Build, baby, build,” he said. “And control immigration that is pushing up population growth and demand for housing.”
Mortgage amortizations of 30 years existed in Canada before the Liberals’ 2024 federal budget announcements. However, home buyers would have to spend at least 20% on a down payment for these mortgages. They would generally be subject to higher interest rates because the lender can’t purchase default insurance in case of foreclosure.
The Canada Mortgage and Housing Corporation only offers default insurance coverage for mortgages with a maximum amortization period of 25 years.
Housing affordability reached an all-time low in April.
Prime Minister Justin Trudeau promised to fix Canada’s housing woes by building four million new homes by 2031, or 1.096 houses per minute, requiring Canada to more than double its housing starts for the next seven years straight.
Since the promise, housing starts have not doubled. In fact, between May and June, they decreased, according to the CMHC.