The introduction of the 30-year insured mortgage in Canada marks a significant shift in the country’s housing market. This new option, announced by the Canadian government in 2024, aims to make homeownership more accessible. This is especially true for younger Canadians like Millennials and Gen Z, who often struggle with keeping up with their monthly payment because of high property prices, student loans, and other financial challenges.
What is a 30-year insured mortgage?
A mortgage is essentially a loan that you take out to buy a home. The time you have to repay this loan is called the amortization period. Traditionally, the maximum amortization period for insured mortgages in Canada was 25 years. With the introduction of the 30-year insured mortgage, borrowers now have an additional five years to repay their mortgage. This means that the monthly payments can be smaller, which can make it easier for people to afford a home.
How does a 30-year mortgage work?
When you take out a mortgage, you borrow a certain amount of money from a lender. This loan comes with an interest rate, which is the cost of borrowing the money. The interest rate can be either a fixed interest rate (which stays the same throughout the mortgage term) or a variable interest rate (which can change over time based on market conditions). The annual interest rate is what you pay over a year, while the periodic interest rate refers to the interest paid over a smaller period, like a month or a quarter.
The amortization schedule shows how your payments are split between paying off the principal (the original loan amount) and the interest. Over the course of the loan, you gradually pay off the principal, building home equity—the portion of the home that you actually own.
Pros of a 30-year mortgage
Lower monthly payments
One of the biggest advantages of a 30-year mortgage is that it offers the option of a lower monthly payment. By spreading the loan over a longer period, each payment is smaller, which can make it easier to manage your finances, especially if you have other obligations like a student loan, personal loan, or property taxes. For instance, if you choose an accelerated bi-weekly or semi-monthly payment schedule, you can still make payments more frequently without increasing the burden.
Flexibility in payment plans
With a longer amortization period, you have more flexibility in your payment plan. Some lenders offer options like biweekly payments, which means you make half of your regular monthly payment every two weeks. This can effectively shorten the amortization period and reduce the overall interest paid, even though your regular payments are smaller. Using a mortgage calculator can help you figure out how different payment schedules affect your total amount paid over time.
Making homeownership more accessible
The introduction of the 30-year mortgage is especially beneficial for first-time homebuyers who might not have a large down payment or who are buying in high-cost markets like Toronto or Vancouver. The lower monthly payments can make it easier to qualify for a mortgage, even with a lower income or higher debt load.
Cons of a 30-year mortgage
Higher total interest paid
While the monthly payment is lower with a 30-year mortgage, the downside is that you’ll end up paying more in interest over the life of the loan. This is because the longer amortization period means you’re borrowing the money for a longer time. For example, with a 25-year mortgage, you might pay off the loan faster and build home equity more quickly. With a 30-year mortgage, more of your early payments go toward interest rather than the principal, which means it takes longer to build equity.
Slower build-up of home equity
Home equity is important because it represents your ownership stake in the property. With a shorter amortization period, you pay down the principal faster, which means you build equity more quickly. However, with a 30-year mortgage, it takes longer to pay down the principal, so it will take longer to build significant equity. This can be a disadvantage if you need to sell the home or take out a home equity loan or line of credit.
Limited to new builds
It’s important to note that the 30-year insured mortgage is only available for new builds. They’re not available for buying an existing home. This limits your options, especially in markets where new homes are either scarce or more expensive than existing properties. Additionally, this type of mortgage requires mortgage default insurance. Typically it’s only needed when your down payment is less than 20% of the purchase price. The insurance premiums may be higher, adding to the overall cost.
Comparing different mortgage options
When deciding whether a 30-year mortgage is right for you, it’s important to compare it with other mortgage options. For example, a 25-year mortgage might have higher monthly payments, but you’ll pay less in interest over time and build equity faster. On the other hand, a 30-year mortgage offers lower payments but at the cost of paying more in interest over the life of the loan.
Using a mortgage calculator can help you compare these options. You can input different interest rates, amortization periods, and payment schedules to see how much you’ll pay in total. It also shows how quickly you’ll build equity and how your monthly payments will be affected by changes in the interest rate or mortgage term.
Mortgage default insurance and other costs
When you get a mortgage with a down payment of less than 20%, you’re required to pay mortgage default insurance. This insurance protects the lender in case you can’t make your payments. With a 30-year mortgage, the insurance premiums might be higher because the loan is riskier for the lender. This is another factor to consider when deciding if a 30-year mortgage is right for you.
In addition to mortgage default insurance, you’ll also need to budget for other costs like property taxes and homeowners insurance. If you plan to make improvements to the property you may also need a line of credit or term loan.
Conclusion
The introduction of the 30-year insured mortgage in Canada offers a new option for homebuyers. It’s particularly advantageous for those who are struggling with high housing costs and other financial obligations. By extending the amortization period, this mortgage option makes it possible to have lower monthly payments, which can make homeownership more accessible. However, it’s important to weigh the benefits against the potential downsides. The main two are higher overall interest costs and slower equity buildup.
Before making a decision, it’s crucial to use tools like a mortgage calculator to compare different options and to think about your long-term financial goals. Whether you’re considering a 30-year mortgage, a 25-year mortgage, or another option, it’s important to understand how the amortization schedule works. Different payment plans affect your overall costs. Understanding these differences can help you make the best choice for your situation.
