Key points:
- The March 2023 federal budget introduced a code to protect Canadian homeowners, which includes extended amortizations on mortgages.
- A longer amortization period has lower monthly fees, but higher interest costs over the life of the mortgage.
Is it worth stretching your amortization?
I was recently featured in a Toronto Star article where I discussed the option of stretching your amortization period beyond 30 years. Here are the important points to consider, including the long-term costs of this move.
Don’t feel like watching? Find the full transcript below!
Chris: [00:00:00] I was recently featured in a Toronto Star article to give my comments about stretching amortization periods beyond 30 years on mortgage payments to help struggling borrowers deal with rising interest payments. And in this video, I want to expand a little bit further and share with you the pros and cons and everything you should consider before deciding whether stretching the amortization on your mortgage is the right choice for you.
Chris: [00:00:28] First off, a little background on why it’s actually possible to stretch the amortization beyond 30 years. In March 2023, in the federal budget, the government came in with something called a code of conduct to protect Canadians with existing mortgages. And in that code of conduct, it says the government is taking steps to ensure that federally regulated financial institutions provide Canadians with fair and equitable access to relief measures that are appropriate for the circumstances they are facing, including by extending amortization. Okay. That’s the key point there. Adjusting payment schedules or authorizing lump sum payments. Existing mortgage regulations may not allow lenders to provide a temporary mortgage amortization extension even past 25 years.
The costs of longer amortization periods
Chris: [00:01:21] Now, it’s absolutely wonderful that the federal government is introducing this to support Canadians, but it comes with a cost. Let’s take a look at an example to show you exactly what I mean. This table shows the amount of interest paid on a $100,000 mortgage at 5.5% over various amortization periods. With a very short amortization of ten years, the monthly payment is high. It’s $1,082 per month and $29,863 are paid in interest. So said another way, $1 of money borrowed cost $0.29 approximately to borrow. On the other end of the spectrum, you have a 35 year amortization. The payment is much lower. It’s almost half. It’s $533 per month. But you end up paying a whopping $123,843 in interest. So said another way, for every $1 you borrow, you will pay $1 and almost $0.24 in interest.
Chris: [00:02:36] So through this example, you can really see the power of amortization because it’s all about monthly payment. Right now, if you’re struggling to meet your monthly obligations, stretching the amortization is going to give you that relief. It comes at that cost of having a higher interest payment to pay back to your lender over the life of the mortgage. And it’s for that reason that my guidance, my advice on this is that you should only consider stretching your amortization if it is the last resort. Before getting to that point, you should be making changes to your household household expenditures where possible to avoid having to stretch the amortization because it’s going to add years of mortgage payments and a lot of interest payment to the lender.
Chris: [00:03:27] Now, if you must go through with stretching the amortization to survive and make ends meet, that’s the reality of today. And a lot of people are having to make that decision. And just remember that this too shall pass. Just like Covid came and went and every other crisis came and went, high interest rates will come and go as well. And as interest rates come down, just because you’re on a 40 or 50 year amortization with your current mortgage doesn’t mean that you are there indefinitely. As interest rates come down, you will be able to take advantage of those lower rates, those lower payments to get you back on track to paying off the mortgage in a more reasonable time period.
Need more help or information?
Chris: [00:04:09] My name is Christopher Molder. I’m a Toronto mortgage broker. If you found any value in today’s video, please consider liking and subscribing. Until next time. Bye for now.
If you’d like to discuss your mortgage, you can contact me here or schedule a convenient call time directly into my calendar below.
