Here's why a mortgage broker thinks a 30-year amortization is a 'trap'

Editor’s note: The figures used in this story are approximate estimates provided by TN Financial Group and the calculations they used. The total amortization costs will fluctuate depending on the bank and the terms of the loan. 

The federal government allowed 30-year mortgage amortizations for first-time homebuyers purchasing new builds in August, and the new rules are set to expand in December to everyone looking to buy a newly-constructed home.

Even though monthly payments are lower, mortgages with longer amortizations come at a huge increase in the amount of interest homebuyers will pay over time.

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"The banks are going to make a killing," said Marc Nixon, the Vice-President of commercial mortgages with TN Financial Group. "The increase in amortization is a trap you're going to be working past retirement."

Many new homebuyers are purchasing their first home at the age of 40, Nixon said.

"It means you've basically increased your retirement age from 65 years old to 70," said Nixon.

Extending the amortization for insured mortgage amortizations is one of several measures introduced by the federal government to try and make housing in Canada more affordable.

"It's about making that first home more available for young Canadians, for first-time home buyers," Federal Finance Minister Chrystia Freeland said on Sept. 16.

Those extra five years could help some first time home buyers get into the market, but at an added cost.

Nixon broke down how much more someone could expect to pay in interest costs if they switched from a 25-year to a 30-year mortgage.

The total interest paid for a $950,000 mortgage at a 4.5 per cent interest rate would be:

• approximately $492,441 for 20-year amortization
• approximately $634,123 for 25-year amortization
• approximately $782,864 for 30-year amortization

The monthly mortgage payments for each amortization period would be:

• approximately $6,010 for 20-year amortization
• approximately $5,280 for 25-year amortization
• approximately $4,814 for 30-year amortization

Nixon believes the 30 year amortization plan is good news for developers and bankers, but in the end home buyers will pay the price with added interest charges.

Using his previous example, anyone switching from a 25-year to a 30-year amortization will pay $466 less on their monthly payments. However, it will take an additional five years to pay off with $148,471 more in interest charges.

Ron Butler, a mortgage broker with Butler Mortgages, told CTV News Toronto he feels 30-year mortgages are unfortunate, but necessary.

"To give the slightest chance to young people you need to give them a 30-year amortization and regrettably that just means there's a ton of extra interest," said Butler.

In the U.S., Americans are allowed to deduct mortgage interest they pay on their homes on their taxes, an idea Nixon says could benefit Canadians.

"I mean they do it in the U.S., I don't know why they are not doing it in Canada. It's getting so unaffordable, it's discouraging for our young people," said Nixon.

Longer mortgages may help some Canadians get into the housing market but it's important to crunch the numbers ahead of time to see how much five more years will cost. With a 30-year mortgage,  homebuyers could try to make extra payments each month, or whenever possible, to try and reduce the balance.