Should You Extend Your Mortgage Amortization?

Your mortgage amortization, also known as your amortization period, is the amount of time it will take you to pay off your mortgage in full. This can range from one to 30 years.

As regulated by the Office of the Superintendent of Financial Institutions in Canada (OSFI), if you have a mortgage with a prime lender, such as one of the Big Six banks or a credit union, the rules for maximum amortization are as follows

A Lenders Vs. B Lenders

For borrowers who don’t qualify for a mortgage at a prime lender, B lenders, such as Equitable Bank or Home Trust, offer an alternative. B lenders don’t need to adhere to the same strict federal regulations that apply to A lenders, and offer more flexibility with qualifying standards, payment options and your amortization period. However, your mortgage interest rate is typically higher than that offered by an A lender for the same mortgage product. B lenders may offer longer amortizations of up to 35 years, but you’ll typically need a downpayment of 20% or more to qualify.

If you’ve exhausted your options with the major banks and B lenders, private mortgage lenders may also be an option.

Mortgage Amortization vs. Mortgage Term

As stated, your mortgage amortization is the amount of time it will take to pay off your mortgage in full.

The rule of thumb is this: The shorter your amortization period, the higher your mortgage payments, but you’ll also pay significantly less interest over the lifetime of your mortgage.

Conversely, the longer your amortization period, the lower your mortgage payments, but you’ll pay more interest over the lifetime of your mortgage.

Your mortgage term is the amount of time you are contractually obligated to pay your lender a certain amount of money at a specified interest rate. Most borrowers will have several mortgage terms over the course of their entire mortgage amortization period. At renewal, you can either keep your amortization schedule as is, or add years to your amortization period with an extension.

What Is Negative Amortization?

There has been a lot of talk in the media lately about negative amortization and that’s because of the record number of Canadians who took out variable-rate mortgages during the pandemic when the housing market was red hot and interest rates were historically low.

According to the above-noted CMHC report, while borrowers currently had a strong preference for fixed-rate mortgages with terms between three and five years, in January 2022, 57% of mortgages were variable-rate compared to only 8% of mortgages in February 2020. (As of August 2023, the share of variable-rate mortgages is back down to 6%.)

With a fixed-rate mortgage, your interest rate stays the same over the term of your mortgage. With a variable-rate mortgage, the interest rate fluctuates according to the prime rate.

There are two kinds of variable-rate mortgages: adjustable-rate mortgages (ARM) and variable-rate mortgages (VRM), also known as variable-rate mortgages with fixed payments, or VFM.

Adjustable-rate mortgage: This type of mortgage has a floating monthly payment that changes in sync with the prime rate; when interest rates go up due to Bank of Canada hikes, so do your payments, but the amount that goes towards your principal remains the same.

Variable-rate mortgage: This type of mortgage has a static payment, so the amount you pay each month remains the same regardless of interest rate hikes or cuts. However, the amount you pay in interest changes in sync with the prime rate. Each VRM has a trigger rate, or the point at which the fixed payment only covers the interest rate, and not any of the principal.

Negative amortization occurs when the monthly payment is less than the amount of interest charged. The unpaid interest is added to your mortgage balance, which increases rather than decreases the amount you owe. This can affect your mortgage in two ways:

• Your amortization increases so it’ll take longer to pay off the loan
• Your mortgage payments will need to increase

According to Fitch Ratings, negative amortizing mortgages accounted for 24% of total mortgages for four of the Big Six banks, namely CIBC, Royal Bank, TD and BMO, as of July 31, 2023. (Bank of Nova Scotia and National Bank of Canada only offer adjustable-rate mortgages, so their mortgages are largely unaffected.)

But does this mean that Canadians might be on the hook and paying off their mortgage for 40, 50 or 60 years? News reports scream of variable-rate mortgage holders reporting an infinity sign on their mortgage statement, suggesting that their mortgage will never be paid off.

According to OSFI, this isn’t entirely accurate. As noted in a September 2023 report, a borrower’s contractual amortization period (such as 25 years) remains intact for the duration of the loan:

“When lenders provide borrowers with mortgage statements…they often include a hypothetical amortization period based on a number of factors, including the remaining principal, the anticipated future payments and the current interest rate. This calculation has, for some borrowers, projected amortization periods of 70 or more years, or in some cases an infinite amortization period. These kinds of projected amortizations are not realistic and do not represent what a borrower’s actual repayment period will be. Importantly, they do not change the borrower’s contractual amortization.”

The report goes on to emphasize that these amortization periods are hypothetical calculations, assuming the borrower makes the same fixed payments for the duration of the loan with the current interest rate.

“It’s only a temporary state between now and your renewal date,” says David Larock, president of Toronto-based Integrated Mortgage Planners, about these so-called 70-year amortizations. “When [the mortgages] come up for renewal, everything is reset and the regular mortgage rules apply and the longest you can amortize your loan is 30 years.”

Still, the amount owing can be greatly affected by rising interest rates, and borrowers with negative amortizing mortgages will be faced with significantly higher payments at renewal.

In the first half of 2023, more than 290,000 borrowers renewed their mortgages with a chartered bank at a higher rate and in 2024 and 2025 an estimated 2.2 million mortgages, representing 45% of all outstanding mortgages in Canada, will be facing interest rate shocks, noted Tania Bourassa-Ochoa, senior specialist of housing research at the CMHC.

While this exposure to risk is making regulators nervous, figures from September 2023 show that Canada’s national mortgage delinquency rate remains low and over 99% of mortgages are in good standing.

An amortization extension applies any time you want to add years to the amortization period of your mortgage, whether it’s a fixed-rate mortgage or a variable-rate mortgage. While there are risks to taking a longer time to pay off your mortgage, there are times it makes good financial sense:

When your home costs over $1 million: Mortgage insurance, or default insurance, is not available for houses costing $1 million or more. Mortgage rates are lower for insured mortgages. So if you live in Vancouver or Toronto, for example, where housing prices are highest, you’ll be stuck paying a higher interest rate.

“When housing prices are going up, a smaller percentage of the home buying population is buying a house worth less than $1 million, so fewer mortgages are going to qualify for default insurance,” says Larock. “The good news is you can now maximize the amortization over 30 years instead of 25 years. So why wouldn’t you set your original payment based on a 30-year amortization to lock in the lowest minimum payment you have to make, and then if you want to pay extra, you can voluntarily increase your regularly scheduled payment or make lump sum payments?”

In this case, he explains, you’re using your prepayment allowances to achieve a shorter effective amortization period.

When you expect a life change: Say you’re thinking about starting a business or a family and you have concerns over your future cash flow in the short-term. If you take a longer amortization, you can make additional payments to your mortgage when your cash flow is good, and make the minimum payment at a time when you need help getting past the crunch.

“There are people who need a reprieve because they are temporarily in a situation that’s tough to manage,” says Larock, using the example of a couple faced with one parent taking a maternity or paternity leave, reducing the amount of money coming in. “But if they can buy some time, they’ll be in a better place.”

Your mortgage renewal is at a higher rate: Homeowners who are currently facing renewals are in for a serious rate shock, with current mortgage interest rates more than triple than what they were before the pandemic. Extending your amortization at renewal can help lower your monthly payments to a more manageable level.

However, prudent homeowners are preparing for those renewals before they happen, says Larock. “The borrowers that I talk to know they are headed for a higher payment at renewal, so they want to set aside money now and take action to set themselves up for the future [by making prepayments on their mortgage].”

Lower monthly payments: Using the example of a $500,000 5-year fixed-term mortgage at 7% paid monthly, here’s how different amortization schedules will affect your mortgage balance at the end of the five years.

Comparing the 25-year amortization versus the 20-year amortization, you’ll pay $344.47 less per month (or $4,133.64 per year).

Added flexibility: Your mortgage is a contractual obligation that sets the minimum payment you must make over the mortgage term. However, your mortgage will also offer the option to prepay your mortgage (or pay extra) up to a certain amount each year (typically 15% or 20%) either by increasing your monthly payment or as a lump sum. By prepaying your mortgage when you have extra cash flow, you’re helping to mitigate the extra interest that you’re now paying due to a longer amortization.

“If you’re locking in at a fixed-rate mortgage or any mortgage that has a term, you want to build in as much flexibility as you can,” says Larock. With a longer amortization you can set a lower contractual payment to provide that flexibility, but then pay extra when you can to keep knocking down your principal. But this might not work for everyone, he says: “You have to have discipline.”

While there are benefits to extending your mortgage amortization, there are some risks:

• You pay more interest over the lifetime of your loan (if you don’t make any prepayments).
• You’ll have to requalify for your mortgage as it’s considered a refinance.
• It takes longer to pay off your mortgage.

If you’re thinking about extending your mortgage amortization, it’s best to time this at the end of your mortgage term when you have to renew, especially if you’re in a closed mortgage. Otherwise you’ll need to pay prepayment penalties for breaking your mortgage contract early. Keep in mind that extending your amortization is considered refinancing, so you will need to requalify for your mortgage.

If you’re thinking about extending your mortgage amortization because you can’t keep up with your monthly payments, there are alternatives to help you free up some cash:

• Increase your income: This could mean asking for a raise, renting out a room in your home or taking on a side hustle.
• Reduce unnecessary expenses: This may seem obvious, but when you start tracking your monthly spending you may find that there are easy places you can cut costs: reduce the amount of takeout food, thrift instead of buying new, or reduce commuting expenses by carpooling or even working from home (if you have the option).
• Consolidate your debt: If you’re also paying off a car loan, credit card bills or student debt in addition to high mortgage payments, consolidating your debt might make your overall payment burden more manageable.
• Choose a different rate: At renewal you can choose a different term length that may offer more manageable payments. However, if you choose a fixed-rate mortgage, the risk is being locked in at a higher rate when interest rates finally do come down.
• Refinance with a different lender: While different terms offer different rates, so do mortgage lenders. You may be able to find a better rate elsewhere, but you will need to requalify for your mortgage at the higher rate.

Related: Best Five-Year Fixed Rate Mortgages in Canada

Extending your mortgage amortization can be part of an effective financial strategy or can buy a homeowner some time when cash flow is tight. “The lazy analysis is to say that extending your mortgage amortization is always a bad idea,” says Larock. “The more sophisticated analysis is to say that sometimes it makes a lot of sense, if it’s a matter of buying time. And sometimes it doesn’t. If you’re dealing with a mortgage professional, they should help you figure out what situation realistically you’re in.”