If you’re getting ready to purchase a home, one of the most important financial decisions you’ll face is choosing the type of mortgage and the term length that best fits your needs. In Canada, a 25-year amortization term is standard, however, due to rising interest rates over the past few years, 30-year amortizations are becoming increasingly popular.
Starting from August 1, 2024, insured first-time homebuyers will be allowed to have 30-year amortization periods when purchasing newly built homes. But even if you’re not a first-time buyer, you can still secure a 30-year mortgage by making at least a 20% down payment or opting for an uninsured mortgage. So if you’re on the fence about which mortgage term length is right for you, it might be helpful to consider whether you’d prefer smaller monthly payments or to pay more in interest over the life of the mortgage.
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To better understand the difference in interest payments between a 30-year mortgage and a 25-year mortgage, Zoocasa calculated how much the average monthly mortgage payment would be in 20 cities across Canada and compared the interest paid on a 25-year mortgage and a 30-year mortgage in each. Mortgages were calculated assuming a 4.79% fixed rate with a 20% down payment and used the most recent benchmark prices available from CREA for March 2024.
The Difference in Interest Paid Can Be Astronomical
Regardless of the mortgage term, the more expensive the home you buy, the larger the mortgage will be. That’s why Vancouver and Toronto require the largest monthly mortgage payments in Canada.
Vancouver’s March 2024 benchmark price of $1,196,800 is the highest in the country, which brings the total mortgage to $957,440. With a 25-year mortgage, Vancouver homeowners will pay $6,818 per month in mortgage payments and $848,681 in interest over the life of the mortgage, while with a 30-year mortgage, homeowners will pay $6,238 per month in mortgage payments and $1,048,861 in interest. That comes out to a whopping $200,000 difference between the interest paid on a 25-year mortgage and a 30-year mortgage.
Toronto homeowners have a similarly large difference between the interest paid on a 25-year mortgage and a 30-year mortgage. With a benchmark price of $1,113,600, Toronto homeowners will pay $6,344 per month in mortgage payments and will pay $789,682 in interest for a 25-year mortgage. With a 30-year mortgage, Toronto homeowners will have a lower monthly mortgage payment at $5,804 per month, but the trade-off is that they will also pay $186,263 more in interest over the entire mortgage period compared to a 25-year mortgage.
Other cities with more than a $125,000 difference in interest paid on a 25-year mortgage and a 30-year mortgage include Hamilton-Burlington, Victoria, and Guelph & District.
The Impact of Mortgage Term Length in Canada’s Most Affordable Cities
Even in the most affordable markets in Canada, the difference in interest paid on a 25-year mortgage and a 30-year mortgage is quite substantial. Take Regina, for example, which has a benchmark price of $313,100. With a 25-year mortgage, a Regina homeowner would pay $1,784 per month in mortgage payments, and with a 30-year mortgage, they would pay $152 less per month with a monthly mortgage payment of $1,632. However, opting for a 25-year mortgage would reduce the total interest paid by $52,370 compared to a 30-year mortgage.
Moncton, St. John’s, Quebec, and Edmonton all have benchmark prices under $400,000, and in all of these cities, a homeowner with a 30-year mortgage will pay at least $55,000 more in interest than a homeowner with a 25-year mortgage. The difference in monthly mortgage payments between a 25-year mortgage and a 30-year mortgage in all of these cities is also less than $200 per month. This further illustrates the importance of carefully considering your mortgage term length, regardless of the city you buy a home in.
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