by Tara Kennedy
on Thursday, June 25th, 2020 at 9:05am.
Why the Change to 25 Year Amortizations?
Back in 2012, CMHC made some changes to Canada’s mortgage rules by only allowing 25 year mortgages to home owners who require home loan insurance through CMHC. The hot housing market and the imminent housing crash spurred the change by wanting to safe guard Canadians from taking on more debt than what they could afford. CMHC felt that a 30 year amortization would create a burden of debt for the consumer.
The advantage of the 30 year mortgage was the ability to have lower monthly payments due to stretching the debt over a longer period of time. Home buyers who required CMHC loan insurance were able to qualify for a home with a 30 year amortization because the monthly payment was feasible.
However, the 30 year mortgage also meant paying more for a home through interest, and, in some cases, at least $40,000 more in interest. The monthly payments of a 30 year mortgage, compared to a 25 year mortgage, are more desirable. However, over the long term, the 25 year mortgage is a better financial option. The amount of interest over the period of the 25 year mortgage will be much lower than the 30 year mortgage.
However, if a homeowner does not have the 20% down payment, and will require CMHC assistance, they will only have the option of a 25 year mortgage.
That being said, some financial institutions still offer 30 year mortgages with a full down payment of at least 20%.