Mortgage Amortization Extensions: Risks And Benefits

Mortgage Amortization Extensions: Risks And Benefits
Written by
  • Ashley Howard
| May 30, 2023
Reviewed, Sep 21, 2023

Recent headlines have been filled with panic around higher interest rates, and many forums are filled with borrowers seeing their variable mortgages hit their trigger rates

This has left many mortgage holders wondering, can I increase the amortization on my mortgage? Due to the steep climb in interest rates over the last year, more and more homeowners are facing this scenario seeking to extend their amortization to keep their payments manageable.

Are you here because you’re in the same boat and wondering if you can change the amortization period on your mortgage in Canada? 

The good news is that it is possible, but it’s a decision that can affect your short and long-term financial health. Before moving forward with any decision, it’s critical to understand how adjusting your amortization can benefit you and the potential risks involved.

Key Takeaways

  • The typical amortization period in Canada is 25 years for high-ratio default-insured mortgages and up to 30 years for uninsured mortgages.
  • Some lenders may offer amortization extensions up to 35 or 40 years with a down payment of at least 20%, or more than 20% equity if you already own the subject property. 
  • Extending the amortization will reduce mortgage payments, but more interest will be paid over time.

Are you a first-time buyer?

What Is An Amortization Period?

Put simply, the amortization period is how long it takes to pay your mortgage in full through regular payments. Generally, if you put down less than 20% as a downpayment, you will only be allowed to amortize for a maximum of 25 years. If you put down 20% or more as a downpayment, you can amortize for up to 30 years.   

What is an Amortization Extension?

An amortization extension is any period beyond what you originally qualified for. The typical amortization period in Canada is 25 years for high-ratio default-insured mortgages and up to 30 years for uninsured mortgages through prime lenders. 

Previously default-insured mortgages could have an amortization period of up to 35 years. This is no longer possible as mortgage default insurance currently only covers up to 25 years meaning extended amortization is not available for insured mortgages. 

Longer amortization options are available in some cases where the amortization period can be extended up to 40 years with subprime lenders. This is also known as an extended amortization and is only possible with a down payment of 20% or more or if you wish to refinance a property you already own. 

Which Lenders And Banks Offer Amortization Extensions?

Prime Lenders do not offer amortization extensions beyond 30 years as these lenders are federally regulated and have strict lending guidelines for mortgage approval. With traditional lenders, the maximum amortization period would be 30 years with a 20% down payment and 25 years with less than a 20% down payment. You can, however, extend your amortization, for example, from 20 years back to 25 years when refinancing. 

Alternative mortgage lenders may be able to offer amortization extensions of 35 to 40 years. These “non-bank” lenders generally have different and more flexible lending criteria when compared to prime lenders and may not offer default-insured mortgages. When default insurance isn’t required, lenders can set their terms and conditions and assume the amount of risk they are comfortable with. It’s important to note that these options will only be available to those with at least a 20% downpayment or more than 20% equity built up. 

Why A Third of Canadians Now Have Amortizations of More Than 30 Years

Due to rising interest rates, some variable-rate mortgage holders with fixed payments are in situations accruing negative amortization. Negative amortizations occur when the remaining amortization increases over time instead of decreasing. Many of these mortgages currently have payments that only cover the interest portion and very little, if any, principal. The amortization period is essentially being extended with each payment as there is little reduction to the principal owing. 

Many big banks report that some of their residential mortgages now have amortizations of over 30 years. It’s currently unclear how these mortgages will be handled at renewal, as they’ll be in for a payment shock. These mortgages will have to revert back to their original amortization period at renewal, which will mean much higher payments. However, lenders and borrowers are awaiting CMHC’s final word on updated guidelines to address these kinds of scenarios. 

First-time Home Buyers Versus Renewers: Who Can Extend Their Mortgage and Why?

Typically first-time home buyers are restricted to a 25 to 30-year amortization period depending on how much they put down as a down payment. Since most first-time home buyers opt to put less than 20% down, they are restricted to a maximum of 25 years for CMHC-insured mortgages. If they have 20% or more to put down, they can extend the amortization to 30 years on the prime lending side.    

Typically most borrowers will lower their amortizations upon completing their 5-year term from 25 and  30 years to 20 and  25, respectively,  when renewing their mortgage. But can you change the amortization period at renewal? The answer is yes – well, maybe; at renewal, you can extend from 20 back to 25 years or 25 back to 30 years if necessary to lower monthly payments. 

Borrowers looking to extend their mortgage amortization at any time other than at renewal would need to refinance the mortgage. This is possible but will require requalifying for the mortgage at today’s rates and may come with some hefty penalties to break the current mortgage. 

First-time buyers and renewers with more than 20% down or more than 20% equity built up can also look to alternative lending for amortizations longer than 30 years if they have trouble qualifying on the prime lending side or want lower monthly payments than what a 25-30 year amortization offers. 

Risks of Extending Your Mortgage Amortization

As with everything, some risks will be involved with extending your mortgage amortization. 

  • It will take longer to pay off the mortgage in full.
  • You will pay more interest over the life of the mortgage.
  • It will take longer to build equity in the home.
  • Interest rates will be higher.
  • Additional costs are involved if refinancing.

To illustrate some of these points, the below chart shows what would happen during amortization periods from 25-40 years on a $600,000 mortgage with an interest rate of 5.39%. As you can see, the longer the amortization, the more interest you will pay to borrow the same amount. 

Amortization Period (Years) Mortgage Amount Interest Rate Monthly Payment Amount Total Interest Paid (on the principal) Total Amount Paid (over the life of the mortgage)
25 $600,000 5.39% $3,624.03 $487,203.75 $1,087,204.75
30 $600,000 5.39% $3,343.19 $603,542.82 $1,203,542.82
35 $600,000 5.39% $3,155.74 $725,409.63 $1,325,409.63
40 $600,000 5.39% $3,025.71 $852,337.58 $1,452,337.58
Disclaimer: Calculations are based on a fixed-rate compounded semi-annually. Amortizations over 30 years will have higher interest rates as they are only available with subprime lending. The above rate is used over the entire amortization period for illustration purposes only.

Benefits of Extending Your Mortgage Amortization

The benefits of extending your mortgage amortization may outweigh some risks. These can include

  • Reducing your mortgage payments and making it more affordable. 
  • Better purchasing power meaning you can qualify for a higher mortgage amount. 
  • Added flexibility – for example, you may be able to port the mortgage or make extra payments when finances allow without added penalties. 

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Frequently Asked Questions

Welcome to our Frequently-Asked Questions (FAQ) section, where we answer the most popular questions designed and crafted by our in-house mortgage experts to help you make informed mortgage financing decisions.

Can you extend your amortization schedule?

Yes, the amortization schedule (period) can be extended under certain circumstances. The length of time you can extend will depend on the type of lender. Additionally, you will need 20% or more for a down payment or more than 20% equity built up in your home to extend your amortization beyond 25 years.

Can you amortize for 35 years in Canada?

Yes, it is possible to amortize for 35 years in Canada. Prime lenders do not offer this option, so you will need to look into alternative lending and have at least a 20% down payment or have built up more than 20% equity in your home before exploring this option.

Can you amortize for 40 years in Canada?

Yes, it is possible to amortize for 40 years in Canada. Prime lenders do not offer this option, so you will need to look into alternative lending and have at least a 20% down payment or have built up more than 20% equity in your home before exploring this option.

Final Thoughts

Although the typical amortization length in Canada ranges from 25 to 30 years with prime lending, many alternative lenders are willing to extend this up to 40 years under certain criteria. The ability to extend amortization will allow borrowers more time to pay off their mortgage through lower payments. 

However, borrowing over a longer period can come with drawbacks, namely an increase in interest-carrying costs over the life of your mortgage. If you’re currently looking to extend your amortization, speak with one of nesto’s commission-free and knowledgeable mortgage experts, who will guide you through the process and discuss the benefits and drawbacks of each option.

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