40-Year MortgagesThe Longest Mortgage in Canada?
If you're in the market for a mortgage, you may be surprised to find out that there’s such a thing as a 40-year mortgage in Canada. So what exactly is a 40-year mortgage? How does it differ from other amortizations? And is it a good idea to opt for such a lengthy mortgage? In this article, we'll answer these questions and more.
- A 40-year mortgage has a longer repayment period than other mortgages, resulting in lower monthly payments.
- People may choose to get a 40-year mortgage for lower monthly payments, improved cash flow, and increased flexibility in their budget.
- To get a 40-year mortgage, borrowers must make a minimum down payment of at least 20% and must turn to an alternative lender, such as a private mortgage lender or Equitable Bank.
- Lengthening your amortization period might not always decrease your monthly payment, if the interest rate for the extended amortization mortgage is higher.
What is a 40-Year Mortgage?
A 40-year mortgage is a mortgage loan that has a repayment period, or amortization period, of 40 years. This means that it will take 40 years to pay off the entire mortgage.
As the repayment period is spread out over a longer period of time, the monthly payments for a 40-year mortgage will be lower than those of a shorter-term mortgage, such as a 25-year, 30-year mortgage, or even 35-year mortgage.
Why Do People Get 40-Year Mortgages?
Having a longer amortization reduces your monthly mortgage payments. People are attracted to 40-year mortgages because they think of them as "affordable" because of their lower monthly payments. However, this doesn't necessarily mean that it's the best option for everyone. You can end up paying a lot more interest than a 25-year mortgage, which can make it more costly in the long run.
So why do some people still choose to get a 40-year mortgage? Here are a few reasons:
1. Lower Monthly Payments
The main attraction of a 40-year mortgage is its lower monthly payments. This can be beneficial for those who have a tight budget or want to free up some cash for other expenses. It can also make homeownership more accessible for those who may not be able to afford a shorter-amortization mortgage.
2. Improved Cash Flow
A 40-year mortgage can provide improved cash flow for those who have irregular income or are self-employed. With lower monthly payments, borrowers may be able to better manage their finances and have a cushion for unexpected expenses. Borrowers are still able to make mortgage prepayments if they have extra cash, allowing them to reduce their amortization.
3. Investors and Rental Properties
Maintaining a positive cash flow can be especially important for investors of rental properties. A 40-year mortgage can help landlords keep their monthly expenses low.
Getting a 40-Year Mortgage
A 40-year mortgage requires a minimum down payment of at least 20%. The larger down payment is necessary because mortgage default insurance is only available for mortgages with an amortization period of 25 years or less. In Canada, you can’t make a down payment of less than 20% without mortgage default insurance.
Canada’s major banks do not offer 40-year mortgages. To get a 40-year mortgage, you’ll need to go with an alternative lender, such as a private mortgage lender. Equitable Bank also offers 40-year mortgages with a third-party lender.
Private mortgage lenders are unregulated, and since they are using their own money to lend out to mortgage borrowers rather than using depositor’s money as a bank, they can do as they please in terms of what amortization periods they offer. However, these lenders charge higher interest rates and may not have the same level of consumer protection as banks and other regulated financial institutions.
Mortgage brokers can help connect you to lenders that may offer longer amortization mortgages. For a borrower that is already able to qualify for a prime mortgage from a bank or other major lender, 40 year mortgages are not a suitable option as they require paying higher rates and fees of alternative lenders.
The mortgage rate for a 40-year mortgage will be much higher than insured mortgage rates, which you’ll commonly see as the lowest mortgage rates in Canada. 40-year mortgage rates are even significantly higher than uninsured rates for shorter amortization periods. Equitable Bank’s 40-year mortgage has an interest rate that starts from 9%.
Equitable Bank, Canada’s seventh-largest bank, made waves in the mortgage industry when it announced in October 2023 that it would start offering 40-year mortgages through a partnership with a third-party lender. This was a significant move as it made Equitable Bank the first major lender to offer a 40-year mortgage in Canada.
Equitable Bank’s 40-year mortgage will be available only within Ontario, British Columbia, and Alberta. It's available for owner-occupied purchases and refinances, as well as rental and investment properties. The mortgage rate on this 40-year mortgage will be 9% and higher.
Comparing 25-Year vs. 40-Year Mortgages
Based on a 9% mortgage rate, let’s see how Equitable’s 40-year mortgage would compare with a 25-year mortgage. We’ll assume a 6% mortgage rate for a 25-year mortgage, and that they both have the same mortgage principal of $500,000.
25-Year Mortgage
$500,000 balance at 6% interest
40-Year Mortgage
$500,000 balance at 9% interest
Monthly Payment
$3,199
Monthly Payment
$3,794
Total Interest
$459,710
Total Interest
$1,320,977
Since the interest rate on this 40-year mortgage is so high, you won’t be saving any money by going with the longer mortgage. Instead, your monthly mortgage payment would be $595 higher than a 25-year mortgage with a 6% mortgage rate!
Drawing this out to the entire mortgage life, assuming that the borrower continues with the same amortization and the mortgage rate stays the same, then the total interest cost of the 40-year mortgage is an eye-watering $1,320,977. That’s almost triple the cost of the 25-year mortgage.
For a cleaner comparison, let’s compare these mortgages with the same interest rate, and for one term only of 5 years.
25-Year Mortgage
$500,000 balance at 6% interest
40-Year Mortgage
$500,000 balance at 9% interest
Monthly Payment
$4,140
Monthly Payment
$3,794
Interest Over 5-Year Term
$213,973
Interest Over 5-Year Term
$219,200
In this case, a 40-year mortgage reduces your monthly payment by $346 per month, or reduces it by 9%, in exchange for a slightly higher interest cost for a 5-year term. Specifically, the total interest paid increases by just over 2%.
- Reduces your monthly mortgage payments, which can help increase your cash flow, if the interest rate stays the same.
- Improves access to homeownership for those that might not qualify for a shorter mortgage with higher payments.
- Significantly higher interest rates can make it a very costly option if borrowers continue to pay the minimum payment for the full term.
- The longer repayment period can delay building equity in your home in your earlier years, as most of your early mortgage payments will go towards interest. This may make it harder to sell or refinance in the future if needed.
Are 40-Year Mortgages Allowed in Canada?
Yes, 40-year mortgages are allowed in Canada. However, they are not as common as mortgages with a shorter amortization and are only offered by select lenders. This is because longer amortization mortgages are considered riskier for lenders.
The Office of the Superintendent of Financial Institutions (OSFI), which is responsible for regulating and supervising financial institutions in Canada, has guidelines where federally-regulated financial institutions (FRFIs) must conduct a thorough assessment of the borrower's financial situation and ensure they have the ability to repay the loan.
Under OSFI’s Guideline B-20: Residential Mortgage Underwriting Practices and Procedures, which is simply what OSFI refers to as a “guidance” rather than an Act or Regulation, federally-regulated financial institutions can only issue insured mortgages with a maximum amortization period of 25 years. However, uninsured mortgages under B-20 can have a longer amortization.
OSFI doesn't have a set maximum amortization for uninsured mortgages, something that it proposed to change in 2023 when it launched public consultation on guideline B-20. During this consultation, OSFI proposed an explicit amortization limit, used for qualification, that would determine the maximum amount of mortgage that a borrower can qualify for. That’s because the amortization affects the mortgage payment amount, which then affects the borrower’s debt service ratios.
“We believe there is merit in lenders applying an explicit, qualifying amortization limit and we will continue to evaluate this proposal.”
Office of the Superintendent of Financial Institutions (OSFI)
In October 2023, OSFI wrapped up its consultations on B-20, with most lenders against regulatory limits, but with some mixed support for a qualifying amortization limit. OSFI responded by agreeing that they will not be pursuing a hard regulatory limit on amortizations in Canada, but that they may consider explicit qualifying amortization limits. This allows for some flexibility in the way that lenders apply these guidelines, which OSFI says will still allow even longer amortizations for some "qualified borrowers".
OSFI says that clear amortization limits on insured mortgages are necessary, but not on uninsured mortgages. This means that 40-year mortgages will continue to be allowed in Canada. The only barrier would be lenders that are willing to offer them.
Are 40-Year Mortgages The Longest in Canada?
For residential mortgages, 40-year mortgages are the longest offered by a mainstream lender in Canada, Equitable Bank.
Rental property mortgages, insured through the CMHC, can also have an amortization period of up to 40 years.
The CMHC insures some commercial mortgages for up to 50 years through MLI Select.
There are a few reasons why the big banks in Canada do not offer 40-year mortgages. One of the main reasons is that these longer-term mortgages are considered higher risk for lenders. Since they’re uninsured, lenders would need to take on the full risk of the loan. This means that the interest rates on 40-year mortgages may be significantly higher than traditional shorter mortgages, making them less attractive to borrowers and reducing the demand for them.
Borrowers that require a 40-year mortgage to be able to afford their payments may also have lower credit scores or less stable employment, something that big banks may be less willing to take on due to their stricter lending policies.
Under OSFI’s Residential Mortgage Underwriting Practices and Procedures Guideline (B-20), when it comes to amortization, each federally-regulated financial institution should have a stated maximum amortization period for underwritten mortgages. It also comes under OSFI’s principle where borrowers must be able to service their debt on a timely basis.
In 2000, the CMHC found that the average age of a first-time home buyer in major Canadian cities was 36 years of age and commented that as the average age of first-time buyers increases, they gravitate towards shorter mortgages. With a 40-year mortgage, this means that the average first-time home buyer would still be paying off their mortgage well into retirement until they are 76 years old, assuming that they don’t refinance or make prepayments. With limited income during retirement, this can be a significant financial burden and may not align with the goals of responsible borrowing.
40-Year Mortgage FAQs
A 40-year mortgage is a type of mortgage loan where the payments are structured so that it would take 40 years until the loan is fully paid off.
Yes, but they are not widely offered by big banks. Equitable Bank has recently started offering 40-year mortgages. The last time that insured mortgages by the CMHC allowed an amortization of 40 years was back in 2008. It was then reduced to 35 years in 2008, and 30 years in 2011, and 25 years in 2012 as per CMHC's rules.
If the mortgage’s interest rate does not change to a large extent, a 40-year mortgage may offer lower monthly payments, making it more affordable for some borrowers.
Yes, longer amortization periods mean higher interest rates and more interest paid over time. It also means that borrowers may still have a mortgage in retirement, which can be financially burdensome.
Disclaimer:
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