Canada’s housing market has been challenging, especially for first-time buyers faced with high property prices and large down payments. In response to affordability concerns, Canadian banks and lenders are now introducing a 30-year amortization period for first-time home buyers. This is a shift from the traditional 25-year amortization, with the aim of making homeownership more accessible. Let’s take a closer look.

Understanding amortization and its impact

Amortization refers to the length of time it takes to pay off a mortgage loan completely. Typically, Canadian mortgages have been limited to a 25-year amortization for buyers who pay less than 20% of the down payment on the home. This has been the standard set by the Canada Mortgage and Housing Corporation (CMHC) for insured mortgages

However, many lenders have started to recognize the financial pressure this places on first-time buyers, especially in high-cost areas like Toronto and Vancouver. Extending the amortization period from 25 to 30 years results in lower monthly payments. For example, a $400,000 mortgage at a 5% interest rate over 25 years results in a monthly payment of approximately $2,326. The same mortgage taken over 30 years would reduce the payment to around $2,147. That’s a difference of nearly $180 per month, that can be significant for many households.

This reduction in monthly payments is the primary appeal of the 30-year amortization, as it enables buyers to manage mortgage costs more comfortably, especially in their early earning years.

Benefits of a 30-year amortization for first-time buyers

The introduction of a 30-year amortization option supports the needs of first-time home buyers for several reasons.

• Lower monthly payments − As noted, extending the payment period reduces the amount paid monthly. This makes budgeting easier and frees up cash for other expenses.
• Increased purchasing power − With lower monthly payments, buyers might qualify for a slightly larger mortgage, enabling them to purchase a home in a preferred area or even a larger home.
• Relief for young buyers − Many first-time home buyers are younger, just starting their careers and facing high student loan debt or entry-level wages. A 30-year amortization allows them to buy a home sooner rather than saving for a substantial down payment.

Drawbacks to consider

While a longer amortization period may make homeownership more attainable, it has some downsides.

• Higher interest costs − Extending a mortgage means paying more interest over time. A 30-year mortgage will accrue significantly more interest compared to a 25-year mortgage, ultimately making the home more expensive in the long run. For instance, over 30 years, a $400,000 mortgage at 5% could cost around $370,000 in interest, compared to about $300,000 over 25 years.
• Longer debt obligation − Being tied to a mortgage for 30 years can limit financial flexibility. It extends the period during which buyers must make monthly payments, potentially reducing their ability to invest in other opportunities or save for retirement.
• Potential impact on market prices − Some experts caution that longer amortizations can inadvertently drive up home prices, as more buyers enter the market with higher purchasing power. This might further inflate the market, creating new challenges for affordability in the long term.

What else is there to know?

It's worth noting that 30-year amortizations are currently only available for uninsured mortgages (those with at least a 20% down payment). Buyers with less than a 20% down payment still fall under the CMHC's rules, which cap amortization at 25 years. This restriction ensures that first-time buyers do not over-leverage themselves with a high loan-to-value ratio, which can be risky.

Furthermore, as of December 15, 2024, all buyers of newly-built homes will be eligible to apply for a mortgage amortized over 30 years.

In closing

While Calgary homes are generally less expensive than those in other large Canadian cities, the 30-year amortization can certainly assist those trying to get into the market as new home owners. Remember, whether or not this is your first time buying a home, I’m ready to help you find what you’re looking for.