So you’re considering getting into the world of homeownership – Congratulations!
It’s an exciting milestone, but diving into the details of mortgages can feel overwhelming. The federal government has introduced new rules allowing first-time homebuyers with less than a 20% down payment to opt for a 30-year amortization period on newly built homes. This extends the traditional 25-year limit and has sparked conversations about the benefits and drawbacks of longer mortgage terms.
For those with a 20% down payment or more, the option to spread payments over 30 years has long been available. But what does this mean for you as a potential buyer?
What is amortization?
When you buy a home, you typically need a mortgage—a loan that helps you afford the purchase. The “amortization period” refers to the length of time you’ll take to fully pay off that loan. Traditionally, a 25-year period has been the standard for most Canadian homebuyers, but the new option for a 30-year period opens up different financial possibilities.
The basics of a down payment
To qualify for a mortgage, you’ll need a minimum of 5% of the home’s purchase price (for homes priced below $1 million). For homes priced above $1 million, you’ll need at least a 20% down payment.
Comparing 25- and 30-Year Amortization
Assuming a fixed interest rate of 4.79%:
25-Year Amortization
• Monthly Payment: $3,193.36
• Total Interest Paid: $405,710.88
30-Year Amortization
• Monthly Payment: $2,938.65
• Total Interest Paid: $486,915.00
While the monthly payment for the 30-year term is $254.71 less, you end up paying $81,204.12 more in interest over the life of the loan.
The Pros and Cons of Each Option
30-Year Amortization
Pros
Lower Monthly Payments: Easier on your budget, freeing up cash for other priorities.
Flexibility: Reduced payments allow for investments, savings, or unexpected expenses.
Easier Entry: Makes homeownership more accessible in high-priced markets.
Cons
Higher Interest Costs: You’ll pay significantly more in interest over time.
Slower Equity Growth: More of your payments go toward interest rather than building home equity.
Longer Commitment: Staying in debt for an additional five years may impact long-term goals.
25-Year Amortization
Pros
Save on Interest: Shorter terms mean lower total interest paid.
Build Equity Faster: A greater portion of payments goes toward the principal.
Debt-Free Sooner: You’ll own your home outright five years earlier.
Cons
Higher Monthly Payments: Puts more strain on your budget.
Reduced Flexibility: Less wiggle room for savings or emergencies.
Harder Qualification: Stricter debt-to-income ratios may limit approval chances.
How to Choose the Right Option for You
The decision between a 25-year and 30-year amortization period depends on your unique financial situation, long-term goals, and comfort with debt. If flexibility is key or your budget is tight, the 30-year option may make more sense. On the other hand, if you want to save on interest and build equity faster, the 25-year option could be a better fit.
Pro Tip: Use a mortgage calculator to run scenarios based on your down payment, interest rates, and purchase price. Understanding how these factors influence your payments and total costs can provide clarity.
Next Steps
Ready to dive deeper? Speak with a trusted mortgage advisor who can guide you through the options and ensure your home-buying journey is as seamless as possible. Homeownership is a significant step, and having the right information makes all the difference!