25 vs 30-year amortization: lower payments or lower interest?

Amortization is the number of years it would take to pay off your mortgage if you kept the same rate and payments. It is different from your term, which is how long your rate and conditions last before you renew. Most Canadian mortgages have a 25-year amortization and a five-year term, so you renew several times before the loan is paid off.

The short version: a longer amortization lowers your payment but costs far more interest. Since December 15, 2024, 30-year amortizations have been available on insured mortgages for first-time buyers and buyers of newly built homes.

What the rules say

For insured mortgages, those with less than 20% down, the standard maximum amortization is 25 years. Effective December 15, 2024, the federal government extended 30-year amortizations to all first-time buyers and to all buyers of newly built homes. Lenders may also offer 30 years on uninsured mortgages, and each sets its own policy.

On an insured mortgage, a 30-year amortization adds a 0.20% surcharge to the insurance premium. On a $540,000 loan, for example, that is about $1,080 more.

Example: a $500,000 mortgage at 4.00%

• 25 years: about $2,630 a month, with total interest of about $289,000.
• 30 years: about $2,378 a month, with total interest of about $356,000.
• The longer amortization saves about $250 a month but costs about $67,000 more in interest.

Why people choose a longer amortization

A longer amortization lowers the payment lenders use to qualify you, so you can borrow more or pass the stress test more easily. At a 6% qualifying rate, moving from 25 to 30 years lowers the qualifying payment by about 7%. It also gives you breathing room in the first years of a mortgage, when budgets are tightest.

Why a shorter one pays off

Interest is charged on the balance, so the faster the balance falls, the less interest you pay. A shorter amortization builds equity sooner and leaves you mortgage-free earlier, which matters if you plan to retire before the loan would end.

Pay faster without committing to it

You do not have to choose between flexibility and speed. Many borrowers take the longer amortization and then pay as if it were shorter:

• Accelerated bi-weekly payments: half your monthly payment every two weeks means 26 half-payments, which equals one extra monthly payment a year. On the $500,000 example at 4%, that pays the mortgage off in about 21.9 years instead of 25 and saves about $40,800 in interest.
• Prepayment privileges: most closed mortgages let you add a lump sum or raise your payment each year without a penalty.
• Renewal: each renewal is a chance to shorten the amortization if your income has grown.

How to decide

• Choose the longer amortization if your budget is tight or your income is uncertain, and plan to prepay when you can.
• Choose the shorter one if you can comfortably afford the higher payment and want to minimize interest.
• Ask your lender how 30-year insured mortgages are priced, since the surcharge and the rate can differ.

Rules and lender policies can change.

Sources: Department of Finance Canada: mortgage reforms, CMHC: premium information.