Mortgage Amortization: Should You Choose 25 or 30 Years?

Your amortization period is how long it would take to pay off your mortgage in full. Choosing 30 years instead of 25 lowers your payment, but it adds interest and slows how fast you build equity. Here is how the rules work for buyers with less than 20% down and with 20% or more, a worked example, how the stress test fits in, and how to shorten your amortization later.

The short version

Amortization and term are not the same

The Financial Consumer Agency of Canada (FCAC) defines the amortization period as the length of time it takes to pay off your mortgage. The term is the length of time your mortgage contract is in effect, with its rate and conditions. Terms range from a few months to five years or longer, and at the end of each one you renew, so you will most likely need several terms to pay off a mortgage.

A five-year term on a 25-year amortization, for example, leaves 20 years to go when you renew. Your amortization sets your regular payment: the longer it is, the smaller each payment and the larger the share of early payments that goes to interest. I compare term lengths in Choosing a Mortgage Term.

Who can choose 30 years

• Less than 20% down. You need mortgage default insurance, which is available only on homes priced under $1.5 million. The maximum amortization is 25 years, or 30 years if at least one borrower is a first-time buyer or the home is newly built.
• First-time buyer. Under the federal rules, someone who has never bought a home, hasn't lived in a home owned by them or their current spouse or common-law partner in the last four years, or has recently been through the breakdown of a marriage or common-law partnership.
• Newly built. A home that has never been occupied for residential purposes. A new condo still counts even if you lived in it during an interim occupancy period before taking ownership.
• 20% or more down. FCAC says your lender sets the maximum. BMO, for example, notes that most lenders allow up to 30 years.

I explain default insurance in Mortgage Default Insurance and the programs for first-time buyers in First-Time Home Buyer Programs in BC.

What 30 years costs: an example

Take a $600,000 mortgage at an example fixed rate of 4.5%, assumed to stay the same for the whole amortization. Real rates change at renewal, so treat these as illustrations:

• Monthly payment: about $3,321 over 25 years and about $3,025 over 30 years, about $296 less.
• Total interest: about $396,300 over 25 years and about $489,100 over 30 years, about $92,900 more.
• Balance after five years: about $526,800 on the 25-year schedule and about $546,600 on the 30-year one.

Over those first five years, the 30-year schedule leaves about $17,700 more in your pocket, but you pay about $2,100 more in interest and build about $19,800 less equity. You feel that at renewal, when a larger balance renews at the rates of the day, and if you sell, when your proceeds are smaller.

The insurance premium on a 30-year mortgage

With less than 20% down, the default insurance premium is a one-time charge that can be added to your mortgage. CMHC's premiums for a 30-year amortization are 0.20 percentage points higher than for 25 years. With 10% down, for example, the premium is 3.30% of the loan instead of 3.10%: on a $600,000 loan, $19,800 instead of $18,600. If you add it to the mortgage, you pay interest on that extra $1,200 too.

Qualifying: the stress test and your debt ratios

Lenders check that you could afford your payments at a qualifying rate: the greater of your contract rate plus 2% or 5.25%. CMHC applies it to the mortgages it insures, and the Office of the Superintendent of Financial Institutions (OSFI), the federal regulator, sets the same minimum for uninsured mortgages at federally regulated lenders such as banks.

For the mortgages it insures, CMHC caps your housing costs (mortgage payment, property taxes, heating and half of any strata fees) at 39% of your gross income, and those costs plus your other debt payments at 44%. It bases the payment on your amortization and loan amount, so a longer amortization lowers it. At the example rate of 4.5%, the qualifying rate is 6.5%, and the qualifying payment on $600,000 is about $4,019 over 25 years and about $3,758 over 30. Put another way, the payment that qualifies $600,000 over 25 years would qualify about $641,600 over 30, about 7% more. Qualifying for more doesn't mean you should borrow more; I explain the ratios in How Much House Can You Afford?

Choosing 30 years and paying like 25

Some buyers take 30 years for the lower required payment, then pay more when they can. At the example rate, paying the 25-year amount of about $3,321 on a 30-year mortgage clears it in 25 years, with the same total interest. Before you count on that flexibility, check:

• Your increase limit. FCAC notes that you may only be able to raise your payments by a certain amount each year, and paying more than your contract allows means a penalty. RBC, for example, allows an increase of up to 10% once in each 12-month period, and TD up to 100% of the original payment during the term. In the example, the 25-year payment is just under 10% higher than the 30-year one.
• Going back down. RBC says you continue an increased payment for the rest of the term, so ask your lender whether, and when, a higher payment can be lowered again.
• The extra costs. With an insured mortgage, you still pay the higher premium. Ask for a rate quote at both amortizations, too.

Waiting has a cost. If you pay the 30-year amount for five years and then want to finish at the 25-year mark, the payment rises to about $3,446, and you pay about $12,300 more interest than you would paying $3,321 from the start.

Shortening or extending it later

You can shorten your amortization at any time by paying more: lump-sum prepayments, higher regular payments or accelerated weekly or biweekly payments, within your contract's limits. The Canadian Bankers Association notes that paying more reduces the length of the amortization period and the interest you pay. At renewal, FCAC suggests checking whether your budget allows bigger payments. I cover the options in Paying Off Your Mortgage Faster.

Extending is harder. BMO notes that you may be able to lengthen your amortization at renewal or when you refinance, but it is treated as a refinance, with a new application subject to approval. If you move an uninsured mortgage to another federally regulated lender at renewal, OSFI exempts you from the stress test only if the amortization and loan amount don't increase. FCAC warns that extending an insured mortgage when you switch lenders may mean a new insurance premium, and that a longer amortization can cost thousands or tens of thousands of dollars in extra interest. Read Renewing Your Mortgage before you decide.

Questions buyers often ask me

What is the difference between amortization and term?

The amortization is the total time it would take to pay off the mortgage, such as 25 or 30 years. The term is how long your current contract, rate and conditions last, such as three or five years, after which you renew for the time that's left.

Can I get a 30-year amortization with less than 20% down?

Yes, if at least one borrower is a first-time buyer or the home is newly built, and the price is under $1.5 million. With CMHC, the insurance premium is 0.20 percentage points higher than it would be at 25 years.

Does a 30-year amortization help me qualify for a bigger mortgage?

It can. For insured mortgages, CMHC has lenders base the qualifying payment on your amortization, so a longer one lowers it and improves your debt ratios. You would also pay more interest, so borrow only what fits your budget.

Can I switch from 30 years to 25 later?

In effect, yes. Prepayments and higher regular payments shorten your amortization, within the limits in your contract. At renewal, you can also ask your lender about a shorter amortization with a higher payment.

Can I extend my amortization later if money gets tight?

Possibly, at renewal or through a refinance, but lenders treat it as a new application and you may need to qualify again. With an insured mortgage, a longer amortization when you switch lenders can mean a new premium, and the extra interest adds up.

Comparing your options? Read Comparing Mortgage Offers, see Fixed or Variable?, or try both amortizations in my mortgage calculator.

This article is general information, not financial advice. The details come from FCAC, the Department of Finance Canada, CMHC, OSFI, the Canadian Bankers Association and lenders' published terms, and were current at the time of writing; your lender's commitment and your mortgage contract set out your own terms. For FCAC's guide, see choosing a mortgage that's right for you.