Recent inflation numbers indicate that inflation is slowing, and many economists are saying that the Bank of Canada has what it needs to continue to pause on rate hikes for the time being. While this is a positive sign, it does not necessarily translate to relief in the cost of living. Many people are still seeking solutions to mitigate the effects of sky-high grocery and other goods prices on their finances. This month, we are focusing on one strategy that could prove to be the difference maker in providing the financial breathing room you need – mortgage amortization extensions.
To start, let us clarify what an amortization period is. It represents the duration it takes to pay off your mortgage fully through regular payments. An amortization extension, on the other hand, refers to any period beyond your initially qualified amortization.
Which Lenders and Banks Offer Amortization Extensions?
Prime lenders, who are federally regulated, typically do not offer amortization extensions beyond 30 years. However, if your current mortgage has a shorter amortization period (i.e., 20 years), you can extend it when refinancing with them. Alternative mortgage lenders, often called “non-bank” lenders, may offer extensions of 35 to 40 years, provided you have at least a 20% down payment or more than 20% equity built up.
Who Can Extend Their Mortgage and Why?
First-time home buyers are typically limited to a maximum amortization period of 25 to 30 years. Most put less than 20% down, needing default mortgage insurance that restricts amortization to a maximum of 25 years. However, if they have 20% or more to put down, they can extend the amortization beyond 25 years.
In contrast, upon renewal, you may choose to extend their amortization. For example, they can go from 20 to 25 years or from 25 years back to 30 years to lower their monthly payments. Keep in mind that these options vary based on individual situations.
It is essential to understand that extending your mortgage amortization outside of renewal would require refinancing, which may incur penalties and necessitate re-qualification at current rates. Nevertheless, refinancing can be a viable solution in certain circumstances. I recommend discussing your specific needs with me to explore your options thoroughly.
For Example …
Imagine a young couple bought their first home five years ago with a $750,000 mortgage at 3.5% interest. They initially chose a 25-year amortization, making a monthly payment of $3,745. Their balance is $635,000 at renewal, with rates at 5.39%. They’re considering extending their amortization to keep their monthly payment the same. Let’s compare the numbers:
Amortization | Monthly Payment | Impact on a monthly budget |
20 | $4,409 | – $664 |
25 | $3,926 | – $181 |
30 | $3,622 | + $123 |
35 | $3,419 | + $326 |
40 | $3,278 | + $467 |
Please note that rates over 30 years are only available with subprime lending and are for illustration purposes only.
Extending your mortgage amortization can be an effective financial strategy, but as with any important financial decision, it is essential to weigh the risks and benefits carefully. If your mortgage is due for renewal this year, I highly recommend you read my blog post: Renewing in a Higher Interest Rate Environment. Please contact me if you have any questions or would like to explore your options further.
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Sidebar: 2023 Fall Economic Statement: What You Need to Know
Deputy Prime Minister and Minister of Finance Chrystia Freeland released the Fall Economic Statement on November 21, 2023. Here is an overview of crucial housing measures that may affect you:
Making Housing More Affordable
The federal government acknowledges the need for long-term housing solutions. To address short-term rentals, starting January 1, 2024, deductions for expenses related to short-term rentals may be denied in areas where they are prohibited.
Underused Housing Tax (UHT)
Introduced in 2022, UHT imposes a one percent tax on non-resident, non-Canadian-owned, vacant, or underused residential real estate. Recent changes:
- Excluded Owners: Certain Canadian entities may become excluded owners.
- Penalty Reduction: Minimum penalties for late UHT filing have been lowered.
- Extended Deadlines: The filing deadline for 2022 and 2023 UHT returns has been extended to April 30, 2024.
Canadian Mortgage Charter
A new Canadian Mortgage Charter is in the works to regulate financial institutions during elevated interest rates and financial stress.
Key relief measures:
- Temporary extensions of mortgage amortization periods.
- Waiving fees for relief measures.
- There is no re-qualification under the insured minimum qualifying rate when switching lenders.
- Early contact before mortgage renewal.
- Options for lump-sum payments or selling the principal residence without prepayment penalties.
- No interest on interest during mortgage relief measures.
These changes can impact your housing decisions. For personalized guidance or questions, contact me, your trusted mortgage broker.
