The interest cost is also extended, of course. But for some, the lower-payment trade-off is worth it.
Ah, the elusive 40-year mortgage. Its use by both traditional (prime) lenders and alternative lenders has waxed and waned over the years, as economic and rate conditions tighten or loosen — big banks can’t currently offer this loan length.
Despite an often-vilified reputation for the ‘extended’ interest paid, these longer mortgages still have a legitimate place in today’s mortgage landscape.
When refinancing or buying a home, extending beyond the industry-standard 25-year amortization to 30 or 40 years spreads out your mortgage balance, lowering your monthly payments and making them more affordable or improving your income-qualifying ratios.
That extra cash or budget room each month can make a difference for homeownership or financial goals, especially if you expect additional funds in your future and the lender offers greater flexibility to draw back the extended loan time later.
What are some pros of extending your mortgage?
More mortgage loan time means lower payments, and the cash flow room has some obvious benefits:
- Use the extra funds to save, spend, invest, or pay off other debt.
- If you own a rental property (or several), it can help you cover expenses or mortgage debt not covered by rent.
- Buying a home? Improved income ratios can help you enter the market or upgrade, or buy a second or vacation home.
- Offset higher rates or other debt payments with a refinance at renewal (or mid-term, though you’ll pay a penalty).
·Build net worth — start sooner or grow your portfolio, for example, in working toward managing multiple properties where a tenant is paying toward your mortgage debt (which you should discuss with a financial advisor familiar with your situation).
·Leverage your start in a high-earning profession by getting the home you want now.
And the cons?
The obvious one is that you’ll have lower payments, but more of them, paying interest for longer. Other considerations when extending a mortgage up to 40 years:
- You may have mortgage debt for longer — even into retirement.
- The longer debt is held, the longer it’s factored into qualifying ratios for other loans, including car and personal loans.
- Debt for longer can also impact your ability to save or pay down other debts.
- Extending at renewal is technically a refinance, which means losing insured mortgage status if you had it, and, therefore, access to lower insured mortgage rates.
What might your payments look like with a 40-year mortgage?
Here’s a simple illustration of the monthly payment relief and additional interest costs of an extended mortgage, using a home purchase price of $425,000 with a 20% down payment (conventional mortgage) and a 5-year fixed rate of 4.59%:
- Over a 25-year amortization — your monthly payment would be about $1,898, for $229,656 in total loan interest paid.
- For a 40-year amortization — your payment would be approximately 20% lower at $1,538 (-$360), with $398,593 in total interest paid (+$168,937).
Try the True North Mortgage 40-year comparison calculator here
Can you reduce the extended interest paid?
Yes, you would have that flexibility, assuming your mortgage contains a feature called pre-payment privileges, which allow you to reduce your principal during your mortgage term without penalty, over and above your regularly scheduled monthly payment.
The additional amounts can be added to your payments or paid down in lump sums up to an annual maximum, which depends on the lender.
This strategy can help you offset the extended interest costs later if you have the funds.
New 40-year mortgage comes with greater pre-payment flexibility
True North’s new prime product, the Extended Mortgage, allows amortizations up to 40 years, and is offered at prime rates (A-lending) with premium features, including 20% annual pre-payment privileges — the most flexible in the industry (most big banks offer a 10% annual privilege).
According to Dan Eisner, True North Mortgage CEO, this product was “designed for homeowners with more than one property, but it also allows for improved income-qualifying ratios for eligible first-time and next-time buyers. Canadians are facing tighter budget constraints every month, and the Extended Mortgage can offer them flexibility in both payment room and in managing their financial goals.”
And if you have weird income or need even more flexible income-qualifying ratios, True North also offers an alternative 40-year mortgage at competitive rates, with the same flexible pre-payment privileges.
These mortgages are only available through a True North mortgage broker, and individual qualifying and home location criteria apply. The company’s in-house lender, THINK Financial, is renowned for offering great rates and better mortgages, and its products and services have saved Canadian homeowners over $124M in mortgage dollars since 2016.
It’s all about time — and your best mortgage strategy
True North Mortgage is a top Canadian brokerage that puts its clients’ needs first, which has earned their team of friendly, salaried, highly trained mortgage experts more than 18,000 5-star reviews — the most in the industry, by far.
With its access to several lenders across traditional, alternative, and private lending channels, their friendly brokers chase down your best deal, personalizing your mortgage solution to fit your needs and goals.
Is the clock ticking on your mortgage decision? Stop time and save with your best rate and mortgage solution — with a real broker who cares. Contact Canada’s No. 1 Mortgage Broker today
