Should you extend your amortization period?

If creeping interest rates and increased mortgage payments are causing you anxiety, you’re not alone. Mortgage rates and inflation are still hitting Canadian households hard, and will probably continue to do so for some time to come.

As a result, more banks are seeing – and offering – longer and longer amortization periods. Major lenders did not have amortization periods longer than 30 years prior to October 2021, however as of Q4 2022, approximately 30% of their mortgage books had amortization rates of over 30 years.

How do you know if extending your amortization period is right for your situation? Like most things, it really depends on a few different factors.

What happens if you extend your amortization period?

When you extend your amortization period, you’re increasing the time – and number of payments – required to pay off your mortgage.

As a result of this increase, your mortgage payments are spread out, resulting in lower payments. This can be appealing for homeowners struggling to keep up with monthly expenses, but the temporary relief may end up being outweighed by the reality of being in debt longer and paying more in interest.

“This is basically kicking the can down the road for consumers, a band-aid solution, as they are not touching the principal of their mortgages and are only paying interest. This may help ease financial burdens in the short-term, but over the long-term it may not be a viable strategy,” says Victor Tran, mortgage broker and RATESDOTCA expert. “Especially considering that upon renewal, the mortgage may have to revert to the contractual amortization schedule.”

At renewal, your lender may offer a different interest rate than your current rate. This can greatly impact your mortgage payment amount – and ultimately, your budget. With rates significantly higher now than even just a year or two ago, many homeowners are in for a shock when their mortgage terms come due, and may find themselves unable to make their mortgage payments.

If you want to extend your amortization period before your mortgage renewal period, you’ll need to refinance your home. This means requalifying for your mortgage at today’s rates, and the possibility of penalties or additional fees.

Reasons to extend your amortization period

If you’re under a variable rate mortgage and interest rates have increased to the point where your payments aren’t covering principal and interest, the additional interest will be added to the amount you borrowed. You may wind up owing more money to your lender than the value of your home. In this case, you should speak with your lender or mortgage broker about your options.

Additionally, if you’ve recently renewed your mortgage or are on a variable rate mortgage, the increased payments could be eating into your monthly budget. Extending your amortization period can buy you a bit of breathing room between paydays.

Risks of extending your amortization period

Extending your amortization period is not without risk. You’ll not only be paying more over the long term, you’ll also be making payments for longer. Increasing your amortization period five years will decrease the monthly payment on a $300,000 mortgage by about $140. But it increases the total interest by more than $100,000 over the life of your mortgage.

Many homeowners plan to pay their mortgage off before they retire. By extending the amortization period, you run the risk of altering those plans – either by having to work longer than you’d like to, or adjusting your retirement goals.

“As this is a relatively new initiative for banks, the way extended amortizations are handled at renewal is likely to change,” says Tran. “Consumers with fixed variable rate payments that have extended their amortizations will need to prepare for a potentially hefty hike in monthly payments upon renewal and be ready to make up the missed principal payments. This should be part of their financial planning for the next several years.”

Alternatives to extending your amortization period

If the thought of extending your amortization period isn’t for you, there are other ways to bring down your mortgage payments – and some don’t involve paying more interest in the future.

First, speak with your lender to see if you qualify for a different interest rate, or a different kind of mortgage product that can lower your payments without lengthening your mortgage.

Another option is to consolidate debt by rolling high interest debt such as credit cards or loans into your mortgage. You can then take the payments you were making to these high-interest debts and apply them to your mortgage.

Depending on the setup of your home, you might also consider renting a room or basement suite to get some help with the mortgage, thus bringing down the portion of the payment you need to cover. This solution isn’t for everyone, but it’s worth considering.

If you can’t afford to make your mortgage payments, extending your amortization period can help you more comfortably make ends meet, and help you avoid defaulting on your mortgage.

Ultimately, the decision of whether you should extend your amortization period comes down to your current financial situation and your future goals. It's important to weigh all your options and speak with your lender or financial advisor before making any decisions about your mortgage. Working with a mortgage broker or comparing mortgage rates online will help ensure you’re getting the best rate possible for your unique situation.