Thinking about buying your first home? For many Canadians, becoming a homeowner right now is a challenging goal. In an effort to help make homeownership more attainable for all Canadians, especially younger Canadians in the Millennial and Gen Z demographics, the government is implementing some changes that could help first-time homebuyers purchase their first home.
One of the upcoming changes scheduled to begin August 1st, 2024 as part of Canada’s Housing Plan includes offering extended mortgage amortizations of up to 30 years for first-time homebuyers. The goal of this change is to make mortgage debt more manageable for those who may be having a harder time entering the housing market. Let’s take a closer look at who is eligible and how this change will impact first-time homebuyers.
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Extended Mortgage Amortizations for First-Time Homebuyers
When it comes to mortgages, amortization refers to the length of time it takes to pay off the mortgage in full. Historically, 25 year amortizations have been the most common for Canadian homeowners, but there are longer and shorter options available. For example, 30 year mortgage amortizations are currently available on uninsured mortgages for anyone buying a home with a deposit of 20% or more of the purchase price.
With this new change being implemented, first-time homebuyers applying for a high-ratio mortgage, meaning their down payment is less than 20% of the purchase price, will have the option to choose a 30 year amortization when they purchase a newly built home.
| Are you eligible for a 30 year mortgage? | |
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Purchasing your first home? |
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Purchasing a newly built home? |
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Downpayment of less than 20% of the purchase price? |
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Will you be living in the property? |
If you answered ‘yes’ to all of these questions, the upcoming 30 year mortgage amortization may be an option worth exploring.
Longer Amortization, Lower Payments
One of the biggest benefits of extending the length of your mortgage is that it lowers the amount of your regular mortgage payments, making them more affordable. Let’s look at the difference between monthly mortgage payments with a 30 year vs a 25 year mortgage amortization.
| Purchase Price | $600,000 |
| Down Payment | 10% ($60,000) |
| Mortgage Amount | $540,000 |
| Interest Rate | 5% |
Monthly Mortgage Payment
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25 Year Amortization $3,140.67 |
30 Year Amortization $2,881.93 |
| Difference of $258.74 a month. | |
For many Canadians, a lower monthly mortgage payment could help make balancing their finances easier, allowing them to save for things like retirement or build an emergency fund. You could even set aside some of the money you’d be saving on lower monthly mortgage payments and put that towards a lump sum payment which is one way to help pay your mortgage off faster. Opting for weekly or bi-weekly mortgage payments is another effective way to pay off your mortgage faster regardless of the amortization length. Extending your mortgage amortization is one way to gain financial flexibility.
Making Homeownership More Attainable
Many of the features incorporated into the 30 year amortization plan are intended to make homeownership more attainable. By letting prospective homeowners make a downpayment of less than 20% of the purchase price of a property and still qualify for an extended mortgage, there’s potential to buy a home sooner and increases their buying power.
With a focus on new builds exclusively, the initiative aims to increase housing inventory and take away some of the competitiveness typically associated with the Canadian housing market.
Important Factors to Keep in Mind
While this initiative may be a game-changer for first-time homebuyers finally looking to enter the housing market, there are some things you’ll want to keep in mind if you’re considering this option.
More Interest: The longer it takes to pay off your mortgage, the more interest you’ll pay. This can be a large sum with housing prices where they’re currently at. Let’s look at our example from earlier and compare the amount of interest that would be paid over 25 years and 30 years.
Total Interest Cost
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25 Year Amortization $402,199.18 |
30 Year Amortization $497,494.52 |
| Difference of $95,295.34 | |
As you can see, the amount of interest paid over 30 years is much higher than the 25 year mortgage. The good news is that selecting a 30 year mortgage amortization doesn’t mean your choice is locked in forever.
A mortgage is broken down into terms ranging from 6 months up to 10 years with the most common mortgage term being 5 years. The term outlines the details of your mortgage contract, like the interest rate and payment schedule. At the end of the mortgage term, you can either pay off the remaining amount owed on the mortgage, or you can renew your mortgage for another term. Mortgage renewal time is a great opportunity to reevaluate your financial situation and make adjustments to your mortgage for the next term.
Home Equity Builds Slower: In addition to having a place to call home, purchasing a property has historically been an effective way to build wealth or equity. Home equity is the market value of your home minus what you owe on your mortgage. With each mortgage payment, what you owe decreases, but with an extended mortgage amortization, you’re paying more in interest over the length of your mortgage, so building home equity takes longer.
Using the Resources to Make Homeownership Work for You
There are other programs, incentives and resources that make it easier for those buying for the first time to realize their goal of homeownership, including the First-Time Home Buyers’ Tax Credit (HBTC) and the First Home Savings Account. MCAP has a robust library of advice and resources for first-time buyers, including a step-by-step guide on buying a home, getting a mortgage and budgeting for the costs of homeownership. You can also use our helpful Mortgage Calculator to calculate your mortgage payments and compare different mortgage options.
For many Canadians, buying their first home is an exciting and emotional time. While it has been challenging to get into the Canadian housing market, the upcoming changes, like the 30 year amortization, intend to make homeownership a goal within reach.
When you’re ready to make the move and purchase your first home, use our Find a Mortgage Broker Tool to find a broker who can help you navigate the process.
