Extending your amortization period means increasing the length of time needed to pay off your mortgage, which usually means longer than the standard 25 years. Not only is it possible, it can actually be a wise financial decision in the right circumstances.
While there are, of course, pros and cons to such a major financial decision, it can mean lower mortgage payments and improved cash flow. Considering today's high interest rates and rising inflation rate, increasing the length of your amortization is an opportunity to consider.
As always, we recommend that you learn all you can before making any big changes to your personal finances. To help with this, we've created this guide to amortization period extensions, offering all the necessary information on both sides of the argument. Take a look.
Key Takeaways
- An amortization period is the amount of time it takes to fully pay down a mortgage.
- The average amortization period is 25 years, but 30% of Canadians have 30-year periods or more.
- The pros of extending your amortization period include having lower monthly payments and better access to cash flow.
- The cons of extending your amortization period include having a longer debt commitment and paying more interest over the length of the mortgage term.
- Alternatives to extending your amortization period include making extra payments on your mortgage, consolidating your debts, and refinancing at a lower interest rate.
What is an amortization extension?
An amortization period is the amount of time it takes to fully pay down your mortgage – so an amortization extension is the act of lengthening this period. This typically looks like 30 years instead of the standard 25 year period.
With interest rates continually rising, many more homeowners are locking into longer amortization periods. Those purchasing new homes are seeking longer terms from the get-go, while those who already own their homes are agreeing to amortization extensions. It can be a particularly appealing option for those with variable rate mortgages who are up for renewal.
While the average amortization period is 25 years, about 30% of homeowners have amortization periods of more than 30 years as of the 4th quarter of 2022. It can be difficult to attain this, though. New borrowers are limited to a 25-year amortization since they typically provide less than a 20% down payment. If they can provide 20% or more, though, they're eligible for a 30-year period.
It is possible to extend to a 40-year amortization period, but this is only available for current homeowners who refinance the property and is only available from subprime, non-traditional lenders.
Here's an example scenario of a homeowner considering an extended amortization from 25 to 30 years:
| Length of amortization period | 25 years | 30 years |
|---|---|---|
| Mortgage amount | $550,000 | $550,000 |
| Interest rate | 5.5% | 5.5% |
| Monthly payment | $3,357.15 | $3,101.48 |
| Total interest paid | $457,145.95 | $566,534.43 |
| Total amount paid | $1,007,145.95 | $1,116,534.43 |
These are some rather sobering numbers – be sure to crunch your own before making any long-term changes.
What happens if you extend your amortization period?
An increased amortization period means that you'll be making payments for a longer period of time. And because you're taking longer to pay, your monthly payments will be lower. This can provide some relief for your household finances, but it isn't always a wise choice for the long term.
A Bloomberg article discusses how "Some Canadian mortgage holders [are] extending amortization periods by more than double." This is particularly dangerous as it means these people will be paying down their mortgages for 70 or 80 years because their payments aren't affecting the principal amount at all.
There are some alternatives to extending your amortization period, and we'll discuss them a bit later.
How to extend your amortization period
If you do decide that extending your amortization period is the best choice, there are only 2 times when you have the opportunity to do so. These are:
- when you're renewing your mortgage, and
- when you're refinancing your mortgage.
During renewal is the best and most common time to make this change, since you're renegotiating many other factors at the same time.
If you're nowhere near renewal and still want to extend this period, your only option is to refinance your mortgage. Even then, it's possible to extend but will likely come with significant penalties for breaking your current mortgage contract. Plus, today's mortgage rates are quite high, as you probably know.
Either way, you'll need to speak with a mortgage broker or directly with your lender in order to proceed.
When you should consider extending your amortization
An increased amortization period isn't necessarily the right move for everyone, but there are a few situations that can tip the scales. If you find yourself in one of the following or a similar position, consider contacting your mortgage broker or lender to discuss an update.
- You're ready to refinance and want to change the terms too. If the interest rate offered at renewal is higher than what you had previously, increasing the amortization period can help lower your monthly payments.
- Your monthly payments are too high and you need increased cashflow. Of course, you'll have to make more payments overall, but lower payments can offer some breathing room.
- You have a variable interest rate that's gone up, so now your payments aren't bringing down the principal at all. Not addressing this can result in negative amortization, which means the length of time it'll take to pay off your mortgage is increasing instead of decreasing.
The pros and cons of extending your amortization period
As with all financial decisions, there are benefits and drawbacks to extending your amortization duration. For instance, it will likely result in lower monthly payments, but you'll be making those payments over a more extended period.
Before signing on the dotted line, consider this list of pros and cons:
| Pros | Cons |
|---|---|
| Lower monthly payments | Higher total interest |
| Improved cash flow | Risk of overextension |
| Easier qualification for larger amounts | Longer debt commitment |
| Added flexibility (porting your mortgage, making extra payments, etc.) | Higher overall cost |
| Offers an opportunity to consolidate other debts with your mortgage | Lower equity buildup |
| Can result in lower income requirements for new buyers | May require you to refinance |
In addition to these considerations, all homeowners should revisit their retirement plans before agreeing to an amortization increase. If the increased timeline continues into your retirement years, you'll want to be sure to budget accordingly. You may even have to defer retirement for a while in order to keep making your mortgage payments.
Alternatives to extending your amortization period
After reviewing the various pros and cons, you may decide that extending your amortization period isn't the right move. But if you still feel like something's got to give, consider this list of alternatives:
- Make extra payments: Making payments whenever possible can help pay off your mortgage faster and reduce the total interest paid. You could also consider increasing your regular monthly payments or switching to biweekly payments instead of monthly.
- Refinance at a lower rate: If interest rates have decreased since you first got your mortgage, refinancing to a lower rate can bring down your monthly payments without extending the term. Just be mindful of any associated fees.
- Debt consolidation: If you have multiple loans or high-interest debt, consolidating them into a single loan with a better interest rate can help you manage your debt more efficiently.
- Talk to your lender: You may find that you qualify for a different interest rate or different mortgage product altogether. For example, if you currently hold a variable-rate mortgage, a fixed rate mortgage option could work better for you.
- Sell, downsize, or rent part of your home: Selling and moving to a less expensive property is an obvious choice, but even renting out a room in your current home can help pay the bills.
- Apply for a HELOC: If cash flow is the problem, a HELOC can provide the funds you need to keep up with your other bills.
Will you extend your amortization period?
Choosing an extended amortization period can be a smart choice for some Canadians, but not all. You should consider speaking with a mortgage broker before making any final decisions.
Are you thinking of extending your amortization period? Or have you already done so? What was the experience like?
Feel free to share your thoughts and experiences with us in the comments section below.
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FAQ
What is an amortization period?
An amortization period is the total time it takes to pay off a loan, like a mortgage. In Canada, it's typically 25 to 30 years. Shorter periods mean higher monthly payments but less interest paid overall.
Can you change the amortization period on your mortgage in Canada?
Yes, you can shorten or extend your amortization period. An extension involves making smaller payments for longer, and shortening can mean paying extra on your mortgage principal, refinancing for a shorter period, or making accelerated biweekly payments.
Can you change your amortization period before renewal?
Yes, but the only other option is to refinance your mortgage. You'll need to requalify for a new mortgage at today's rates, which are likely higher than what you originally had. Plus, there will probably be hefty penalties to pay.
Is there a maximum amortization period in Canada?
Yes, the maximum amortization period for CMHC-insured mortgages is 25 years. If a mortgage isn't CMHC-insured, the max amortization period is stretched to 35 years. 40-year amortizations are rare but are available from alternative lenders.
What's the average amortization period in Canada?
The average amortization period in Canada is 25 years. Choosing a longer period can result in lower monthly payments, but choosing a shorter period means higher payments, which can be difficult for many homeowners to maintain.
Can you explain amortization vs. depreciation?
Amortization and depreciation are 2 different things. Amortization refers to the length of time it takes for someone to pay off your mortgage. Depreciation happens when your property decreases in value, whether from age or other factors.
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