In a climate of sky-high interest rates, persistently high inflation, and widely unattainable home prices, 25-year mortgages are no longer the name of the game.
In fact, an increasing number of Canadians are signing themselves up for mortgage amortization periods of 35 to 40 years -- or more. Yes, that could mean nearly half a lifetime (if you’re lucky enough to live that long) of paying off your home.
Typically, borrowers have a maximum of 25 years to pay down their mortgage if they make a down payment that is less than 20% of the property’s purchase price. As far as the big banks are concerned, the amortization period was historically 30 years for a borrower who makes a minimum 20% down payment on their home.
But times have changed. Now, major lenders like BMO, RBC, and CIBC are experiencing sharp increases in amortization periods beyond 30 years -- something none of them saw as recently as October 2021. In fact, recent research revealed that a shocking 33.3% of Canadians with mortgages have amortization periods north of 30 years.
“Bank of Canada data show the share of new mortgages with amortizations over 25 years is up 14 percentage points since the start of the pandemic,” Toronto-based mortgage consultant Robert McLister tells STOREYS. "On top of that, big banks are reporting that roughly 30% of their mortgages have effective amortizations over 30 years.”
For countless Canadians, longer amortization periods offer the benefit of lower monthly payments that come with a longer repayment timeframe. But some experts and regulators are raising warning bells about risks associated with higher amortization rates. The worry is that a 35 or 40-year mortgage can cost the borrower hundreds of thousands of dollars in interest over time (as opposed to a 25-year term) and that homeowners who must revert to their original amortization agreement when renewing their mortgage may face increases to their monthly payments that they can't afford.
Toronto Home/Shutterstock
McLister, however, says that borrowers with longer amortizations pay more in mortgage interest, but that doesn’t necessarily mean they’re more risky or costlier. “Choosing a longer amortization can actually reduce risk in many circumstances,” he says. “Payment savings from longer amortization can be redirected to uses that increase net worth -- more so than making mortgage payments. Examples include paying off higher-interest debt, investing in a business, or investing in an asset that generates a higher ROI.”
Some people, especially those with variable income streams like the self-employed, can use the payment savings to build an emergency fund, highlights McLister. “Having a longer amortization allows people to make extra mortgage payments when they want to, not when they have to. Such prepayments lower their effective amortization," he says.
McLister notes, however, that he’s not referring to variable-rate borrowers who have hit their trigger rates and seen payments surge unexpectedly. “That's a different story,” he says. “In a meaningful minority of cases, such folks are in dire straits because they can't afford their payments anymore. Fortunately, banks have been reasonably willing to work with borrowers to extend amortization and capitalize payments. But not all lenders are so understanding.”
McLister also highlights that longer amortization periods are a temporary choice for many Canadians. “Longer amortization periods are largely due to rates surging and variable-rate borrowers having fixed payments,” says McLister. “Because the payments don't change right away, these borrowers haven't been covering all their interest. As a result, their mortgage payoff time (amortization) gets extended temporarily -- until renewal, that is. At renewal, the lender resets their payment to get them back on their original amortization schedule.”
Inevitably, however, some borrowers may be getting themselves into trouble. Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), has recently warned of risks associated with today's mortgage amortization rates, referring to them as short-term solutions that will result in more debt.
“While increasing amortization is one way to cope with higher interest rate hikes in the short term, it’s not without risk,” Carole Saindon, Senior Media Relations Officer at OSFI tells STOREYS. “Extended amortizations will lead to a greater persistence of outstanding balances, and greater risk of loss to lenders.”
A new report from RBC revealed that Canadian mortgage delinquencies could raise by one-third in the coming year. Written by RBC Assistant Chief Economist Robert Hogue and Research Analyst Mishael Liu, the report outlined the heightened amount of debt that Canadians took on during the pandemic, with the household debt-to-income ratio exceeding pre-pandemic levels by late 2021. “It’s remained elevated ever since,” reads the report.
The potential of a looming recession this year only compounds this risk. With a growing number of Canadians having to renew their fixed-rate mortgages at a higher rate and expected recession-related job losses -- RBC projects that the unemployment rate will rise from 5% to 6.6% -- the bank says it is preparing for more delinquencies and consumer insolvencies across the country.
“Our conversations with financial institutions we oversee have emphasized the need to be proactive in managing all types of mortgage accounts, and to act before levels of borrower stress become unmanageable,” says Saindon. “OSFI expects lenders’ risk management to be responsive to changing conditions, and practices to be adjusted accordingly.”
Saindon says that these are ultimately decisions that will be made at the lender level. “We appreciate that lenders are working with Canadians to help them stay in their homes, while also ensuring the actions taken remain within the institutions’ risk appetite, including holding appropriate reserve levels,” says Saindon. “With respect to uninsured mortgages, we expect mortgage lenders to ensure that any changes to a mortgage remain prudent, within each bank’s risk appetite, and do not inadvertently extend or create new issues.”
In January, OSFI proposed enforcing stricter lending requirements that would make it even more difficult for Canadians to get approved for a mortgage. The first phase of OFSI’s consultation on Guideline B-20 for residential mortgage underwriting closed April 14, 2023. “We are currently analyzing stakeholder submissions and later this fall we plan to issue a Public Summary of Submissions Report,” says Saindon.
In the meantime, when does it make sense to take out a 30+-year mortgage? According to McLister, 40-year mortgages can make sense for non-prime mortgages (as 30 years is generally the maximum for most prime mortgages) and when variable-rate borrowers are not paying all their interest due to fixed payments and soaring rates.
“People forget about the time value of money,” says McLister. “In times of higher inflation, longer amortizations let you shift more of your repayments to the future -- when you can pay with depreciated dollars. That's because inflation makes money worth less in the future. In turn, your mortgage payments become a smaller and smaller share of your income.”
At the end of the day, amortization periods remain a personal choice that’s circumstance-based.
“It's not my place to tell a family with better uses for their cash that they should pay their mortgage in 25 years, simply because that's what the ‘experts’ say is prudent, or because that's how their parents did it,” says McLister. “The 25-year standard for amortizations is an outdated, artificial, and often economically unsound limitation. Regulators get caught up in outdated thinking as well. They've done Canadians a disservice by outright banning useful tools like 40-year amortizations, simply because a minority of people overborrow.”
He says, however, that the amortization used to set your payments can be -- and sometimes should be -- different from the amortization used to underwrite a new mortgage. “Depending on overall housing risk, it may make sense to require people to qualify with a maximum 30-year amortization, but allow them to repay on a 50-year schedule,” says McLister.
