Should you extend your amortization at mortgage renewal time?

For Canadians who currently have a mortgage, higher interest payments are a certainty in the near future. That’s the harsh truth, despite expectations that the Bank of Canada (BoC) is preparing to cut rates within the next few months.

This is because the majority (more than 70%) of existing mortgage holders locked into a fixed mortgage rate when they were at record lows five years ago – and those borrowers will face higher rates when they renew their mortgages today. Even if those borrowers waited for the BoC to lower the cost of borrowing by 0.75% (largely viewed as the best-case scenario for 2024), the mortgage rates available today are still several percentage points higher than the rates currently held by this group.

In fact, according to the Bank of Canada, 80% of all mortgages that were outstanding as of March 2022 will come up for renewal in 2024, and “virtually all” remaining mortgages will go through their renewal cycle by 2026. That means just about everyone with a mortgage today will need to contend with a tougher rate reality within the next few years.

Also read: Renewing your mortgage in 2024? Here’s what to expect

Options for renewing mortgage borrowers

However, there are some options for borrowers with upcoming mortgage renewals who are facing higher mortgage payments, such as extending the length of their mortgage’s amortization period (the full length of time it takes to pay off the mortgage in full).

“The good news is that many borrowers can lower their monthly payments by extending their amortization,” says Penelope Graham, Director of Mortgage Content at Ratehub.ca. “The amount you can decrease your payments by depends on how long you’ve had the mortgage. The longer you’ve had the mortgage, and the more equity you’ve built up, the longer you’ll be able to push out your payments.” 

“Generally speaking, if you add an additional five years, your payments will be lower, but not as low as what you started out with. If you are able to add 10 years, your payments will be very similar to what you’re paying now.”

How extending your mortgage amortization works

In Canada, the longest period of time a mortgage can be amortized is 30 years, for mortgage borrowers with 20% or more equity in their property (an exception to this are mortgages offered by “B” or alternative lenders, which may go up to 35 years for qualifying borrowers). Borrowers with less than 20% in equity must take out a “high-ratio” or insured mortgage, with an amortization capped at 25 years. 

Also read: Federal government introduces 30-year mortgages for some insured borrowers

However, as borrowers pay down their mortgage over time and build up over 20% equity, they may have the option to  change their amortization length when they come up for renewal. Doing so can provide immediate payment relief by spreading payments over a longer timeline, and lowering what’s paid monthly. These options could include:

• Sticking to their original amortization schedule and simply renewing at the best available mortgage rate at the time
  
  
• Switching to an uninsured mortgage type at renewal, and extending their amortization by five years (for a total of 30 years). There is no penalty to do so when renewing the mortgage term, though a lawyer will be needed to re-register the mortgage.
  
  
• Breaking their mortgage and refinancing into a brand-new uninsured mortgage, with a full 30–year amortization (for a total of 35 years). This can either be done at renewal time with no penalty, or any time during the term, if the borrower is willing to pay any applicable pre-payment penalties.

How a longer mortgage amortization impacts payments

To see how the above scenarios could impact mortgage payments, Ratehub crunched the following calculations for amortization scenarios upon renewal, assuming the following:

• Purchase date: May 2019 
• Original purchase price: $508,000 (national average home price) 
• Down payment: 10% ($50,800)
• Total mortgage: $471,373
• Original amortization: 25 year 
• Original mortgage rate: 5-year fixed mortgage rate of 2.74% (best rate available)
• Current monthly payment: $2,168

Data in the chart is based on a mortgage amount of $400,872 (the remaining balance at renewal after the first 5 years of the mortgage). The information in this chart is for illustration purposes only.

If the borrower were to stick with their original plan, and renews at a rate of 5.19% (the best available) and leaves 20 years remaining on their amortization, their new monthly mortgage payment would be $2,676 – $508 more than the $2,168 they were previously paying.

However, this monthly payment is then lowered to $2,375 when they choose to extend their remaining amortization to 25 years – a difference of just $207.

This lowers further when the borrower chooses to extend all the way up to 30 years, with a monthly payment of $2,185 – a difference of just $17 more per month.

Extending your amortization comes with additional interest costs

The trade-off for a longer amortization period, however, is more interest paid over the course of the mortgage, as less principal is paid off during the term; in our 30-year scenario, the borrower will pay a total of $99,048 in interest once the term is through, compared to $95,007 if they had stuck to their original timeline. For borrowers who need immediate payment relief, however, it can be the right approach.

That higher interest bill can also be mitigated if the borrower is in the position later on to pay off more of their mortgage with a prepayment.

“Borrowers will always have the option of increasing their payment or making lump sum payments to catch up to the original amortization if they find themselves with extra money,” Graham says, adding, “You can always get back to your original amortization if you choose and there is no penalty to do so.”

However, as with any mortgage decision, it’s important that borrowers work closely with a mortgage professional to ensure extending their amortization is a strategy that fits their financial situation and long term goals.

“Canadians should walk through all their different options at renewal with their mortgage broker and choose an amortization that creates mortgage payments that fit their monthly budget,” Graham says.

Also read:

• Bank of Canada holds target interest rate at 5% in April announcement
• Should I extend my mortgage amortization?
• Renewing your mortgage in 2024? Here’s what to expect
• 5 tips for mortgage renewal time
• Understanding the mortgage renewal process