Mortgage amortization: Should you go long or short?

This article has been updated from a previous version.

The Canadian housing market is showing signs of a shift. After a turbulent stretch of high interest rates, some stability is finally emerging.

In March, the Bank of Canada cut its key rate to 2.75%, down from 5% in mid-2024—a 2.25% drop aimed at easing financial pressures on Canadians after a period of aggressive rate hikes.

Yet, despite lower rates, housing affordability remains a major hurdle. Prices in cities like Toronto and Vancouver are still sky-high, keeping homeownership out of reach for many. Adding to the strain, the economy is grappling with challenges, including a rise in unemployment to 6.7% in March following the loss of 33,000 jobs, according to Statistics Canada.

So, how are Canadians coping? Many are turning to longer mortgage terms to ease the burden of monthly payments. In fact, nearly half of Canadian mortgages now have amortizations exceeding 20 years, with a growing number stretching beyond 30 years, according to the Bank of Canada.

But is extending your mortgage amortization always the right decision? Here’s what you need to consider.

Read more: How much more money do you need to make to buy a home in Canada?

Benefits of a longer mortgage amortization 

Currently, homebuyers who put less than 20% down are limited to a maximum amortization of 25 years. For uninsured mortgages, amortizations of up to 30 years are standard.

As of August 2024, a new policy allows first-time homebuyers purchasing newly built homes to extend their insured mortgage amortizations to 30 years. This change aims to make monthly payments more affordable for younger Canadians entering the housing market.

Related: For many Canadian families, the great wealth transfer can’t come soon enough

Why consider a longer mortgage amortization?

A longer amortization can act as a financial safety net. By reducing monthly payments, it provides flexibility to manage unexpected financial challenges, such as job loss or illness. However, it’s important to note that while monthly payments are lower, the total interest paid over the life of the mortgage will be higher.

That said, many lenders offer prepayment privileges, allowing borrowers to pay off their mortgage faster without penalties. Options like making lump-sum payments, increasing payment frequency (e.g., bi-weekly or weekly), or paying more than the minimum can help reduce the overall interest paid.

For those juggling other financial priorities, a longer amortization can free up cash flow to focus on high-interest debts, such as credit cards, or to invest in opportunities like Registered Retirement Savings Plans (RRSPs) or other investments with higher returns than the mortgage interest rate.

Ultimately, a longer amortization provides flexibility. It lowers monthly payments to a manageable level while allowing borrowers to accelerate payments when financially feasible. This balance can be particularly beneficial for those navigating today’s high housing costs and economic uncertainties.

Read next: Lenders will offer 30-year amortizations on some insured mortgages. How does this affect you?

Benefits of a shorter mortgage amortization

If you’re someone who struggles to save or tends to spend disposable income quickly, a longer amortization might not be the best fit.

A shorter amortization, on the other hand, acts as a form of forced savings. By committing to higher monthly payments, you reduce the temptation to overspend and save thousands in interest over the life of your mortgage.

Here’s why it might be worth considering:

• Save on interest: With a shorter amortization, you pay off your mortgage principal faster, significantly reducing the total interest paid.
• Build equity faster: Paying down your principal sooner means you build equity in your home more quickly.
• Flexibility for the future: If circumstances change, you can often extend your amortization later to reduce monthly payments and manage higher interest rates.

That said, if you’re disciplined with your finances, you could use the extra cash from a longer amortization to invest in higher-return opportunities, like your RRSP or other investments. This strategy could help you take advantage of the interest rate differential between your mortgage and your investments.

Using the RATESDOTCA mortgage payment calculator, here’s how a shorter amortization can save you money:

• If you have a $500,000 mortgage at a fixed interest rate of 4.19%, your monthly payments will be $2,145 and you will pay around $143,500 in interest over a 25-year amortization period. 
• If you choose a shorter amortization of 20 years, you will see those monthly payments rise to $2,456, but you would pay $54,060 less in interest, for a total interest of $89,440.

Choosing the right path for you

When choosing between a shorter or longer amortization, it’s important to align your decision with your financial habits, discipline, and priorities. 

Tools like the RATESDOTCA mortgage payment calculator can help you create a starting budget by factoring in your household income and expenses, but consider the following first: 

• A longer amortization: Ideal for those with inconsistent income, first-time homebuyers on a tight budget, or anyone looking to invest their disposable income elsewhere.
• A shorter amortization: Best for those who can comfortably afford higher payments and want to save on interest while building equity faster.

Choosing the right amortization is a personal decision that depends on your unique financial situation and goals, so, take the time to shop around for the best rates, plan carefully, and make the choice that sets you up for long-term success.

Learn more: Will the Bank of Canada’s jumbo cut add fuel to the warming house market?