Should I extend my mortgage amortization?

This piece was originally published on March 4, 2024, and was updated on April 24, 2024. 

If you’re worried about your mortgage payment going up because of rising interest rates, you’re not alone.

Data from the Canadian Mortgage and Housing Corporation (CMHC) shows that while the size of the average new mortgage loan in Canada (originations and refinances) has shrunk by about 7% since the third quarter of 2022, the average payment has gone up by almost 9% on an annual basis. As well, according to Statistics, the amount of mortgage interest Canadians pay was up 29.8% year over year as of November, accounting for one of the largest contributors to rising CPI. 

This is thanks entirely to rising interest rates, which increased sharply as the Bank of Canada kicked off a series of rate hikes between March 2022 and July 2023. As a result, the benchmark cost of borrowing has increased to 5%, leading to a Prime rate of 7.2%. For many mortgage borrowers, particularly those who took mortgages out prior or during the pandemic, that means facing a significantly higher mortgage payment upon renewal – by as much as 40% for some, according to projections from BMO.

If you’re facing a significantly higher mortgage payment at renewal, a possible solution is to extend the amortization period of your mortgage (the length of time over which your payments are spread out). By taking longer to pay your mortgage, you can reduce your monthly payments and make them more manageable. Whether extending your mortgage amortization is the best choice for you, however, is another question. First, watch this short video with some helpful tips for renewing your mortgage in 2024. Then, let’s take a look at whether taking longer to pay off your mortgage is the best solution to rising payments.

Also read: Amortization – Short vs. long term

What is amortization and how does it affect my mortgage payment?

When you get a mortgage, there are two lengths of time you have to think about: the term, which is the length of your mortgage contract, and the amortization, the period over which payments are made.

The longer your amortization period, the smaller your payments will be. For example, let’s say you have a $1,000,000 mortgage, and a five-year fixed mortgage rate of 5.24%. With a 25-year amortization, your monthly payment would be $4,763. If you chose to lengthen your amortization to 30 years with all other factors remaining the same, that payment would lower to $3,870.

Why would I want to extend my amortization period?

Because interest rates have risen rapidly over the past two years, your monthly payment is likely to rise significantly at renewal.

Imagine you took out a $774,592 ($800,000 minus the minimum down payment of $55,200) mortgage on January 1st, 2019, with the day’s best 5-year fixed rate of 3.19%, and amortized it over 25 years. Under this arrangement, you would have paid $3,742 a month and aimed to be mortgage-free in the year 2044.

Now, your mortgage is up for renewal on January 1, 2024, and the best five-year fixed mortgage rate available is 4.89%. At this point, you’ve paid a total of $110,113 toward your mortgage principal over the first five years of your mortgage, leaving you with a balance of $664,479 at renewal time. Using Ratehub.ca’s renewal calculator, we can see that renewing for another five-year term at the new, higher, rate, with a remaining 20-year amortization, will result in a monthly payment of $4,327 – a difference of $585 each month. 

For a Canadian household trying to keep up with inflation and overall higher cost of living, that’s no small chunk of change.

But this payment assumes you’re continuing on with the original amortization; if you extend the amortization back to 25 years and plan to keep paying until 2049, you can get your payment down to a more manageable $3,823 – a difference of just $81 more per month.

What are the pitfalls of extending my mortgage amortization?

While extending your amortization will help keep your monthly payments in check, there are many downsides to this strategy.

The obvious drawback is the added time it will take to pay off your mortgage. With the above example, extending your amortization would extend your payments into the year 2049. If you’re 45 years old today, you won’t pay off your mortgage until age 70.

A less obvious downside is the extra interest you’ll pay. Without extending the amortization period, our example mortgage would cost an estimated $371,024 in interest over the remaining 20 years. Extending the amortization period to 25 years, however, raises the estimated interest cost to $482,643 – an expense of over $110,000.

In this example, extending the amortization by five years adds $111,439 to the total cost of borrowing over the lifetime of the mortgage.

There’s also an immediate cost to extending your amortization period, as it will require you to refinance your mortgage. While there are upsides to refinancing (like potentially getting a better mortgage rate or consolidating debts into your mortgage), there are fees to consider. In addition to paying a real estate lawyer to do the paperwork, you may have to pay for an appraisal and you’ll likely pay your existing lender a mortgage discharge fee. In all, the cash cost of refinancing your mortgage will likely range from $1,500 to $3,000.

Extending my amortization or hitting my trigger rate: What’s the difference?

It should be noted that opting to extend your amortization period at renewal or during a refinance is a different scenario than borrowers who have hit their trigger rate, and have needed their amortizations extended in order to keep them from negatively amortizing – a phenomenon that exploded in practice over the course of the Bank of Canada’s hiking cycle.

In these instances, with each rate increase, borrowers with variable-rate mortgages on a fixed payment schedule saw less and less of their payment contribute to their principal balance, and more of it serving interest. Many of these borrowers eventually hit the point where none of their payment went toward their principal balance, aka their “trigger rate”. 

Lenders then stepped  in with extraordinary measures in order to keep these mortgages viable and to prevent the borrowers from defaulting. They did this by temporarily extending – in theory – the amortization periods of these mortgages, sometimes by as much as decades. However, these borrowers will need to resume their original amortization schedule upon renewal time. 

While drawing ire as a high-risk practice by Canada’s banking regulator OSFI, extending amortizations for distressed mortgages is a form of support endorsed by the Financial Consumer Agency of Canada, and was recently codified by the federal government’s new Canadian Mortgage Charter.

Also read: How much interest would you pay on a 90-year mortgage?

How do I go about extending my amortization?

Choosing to extend your amortization period starts with a conversation with your lender. They’ll be able to help you examine your options and tell you how to go about making the change.

It’s also a good idea to check in with a mortgage broker for advice. Because mortgage brokers work with multiple lenders, they can access more options and get mortgage companies competing for your business. And their services are free for consumers, so there’s no risk involved.

What other options do I have?

If your rising mortgage payment is straining your budget, you may have other options aside from extending your amortization period. If your mortgage is close to renewal, with the promise of rate cuts by the Bank of Canada in the latter half of 2024 and into 2025, there may be ways for you to take advantage of lower rates just over the horizon and save some money. Take a look at this video on the topic, then read on for more options. 

• Look for other ways to reduce your payments. You might be able to lower your payment by getting a different interest rate or a different kind of mortgage product. You might also be able to lower your overall debt payments by using your mortgage to consolidate debt. A mortgage broker is a fantastic resource for exploring your options.
  
  
• Use a home equity line of credit to access cash. Depending on your budget, a home equity line of credit (HELOC) may give you the flexibility you need. Rather than reducing your monthly payments, you can use a HELOC to withdraw only the money you need, when you need it. Your mortgage broker can help you understand the benefits and risks of this strategy.
  
  
• Make more money. Okay, duh. But if you can increase your income enough to cover the difference in payments, you’ll be far better off over the long run. Consider asking for a raise at work, looking for a higher paying job, taking on a side hustle, or renting out a portion of your property.
  
  
• Sell your home. If you can’t afford your mortgage payments, you may need to reconsider whether owning a home is right for you. Consider whether downsizing to a smaller home, or choosing to rent instead, will be better for you in the long run.

The bottom line

Extending your mortgage’s amortization period can reduce your monthly payments, but at a significant cost. Consider other options before choosing this strategy, and ask a mortgage broker for advice to find out if there are better ways to make your mortgage payments more manageable.

Also read: 

• The Trigger Rate: Everything You Need to Know
• Should I Buy a House in a Recession?
• The New Tax-Free First Home Savings Account
• Mortgages and Inflation: How Do They Affect Each Other?
• The Bank of Mom and Dad and Your Down Payment
• How Does the Rising Stress Test Impact Mortgage Affordability?
• Should You Switch From a Variable-Rate to a Fixed-Rate Mortgage?
• Is a Short-Term Fixed-Rate Mortgage Right For You?

*Based on a $700,000 home price, 10% down payment, amortized over 25 years, and a five-year fixed mortgage rate of 4.64% vs. 4.39%.