A 25-year mortgage is the most common mortgage length in Canada – but that doesn’t mean it’s the right choice for everyone. If you’ve got an insured mortgage, 25- years is the longest amortization period you can choose, while those with an uninsured mortgage can take advantage of 30- or 35- year mortgages. But if you’re looking to own your home faster and pay less interest over the life of your mortgage, you’ll want to look into 15- or 20- year amortization periods.
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How does a 25-year mortgage compare to other amortization periods?
With an amortization period of 25- to 35- years, you can keep your monthly payments low, but you’ll pay more interest over the life of your mortgage. Depending on your APR, you can end up paying close to your initial principal in interest alone with a 25-year amortization period — though you’ll pay less than with a 30- or 35- year term. By shortening your term to 15- or 20- years, you’ll pay more monthly, but can save big in the long run when it comes to interest.
For a $200,000 mortgage at a fixed interest rate of 3%, you’d pay…
Total Interest Paid
For example, on a 25-year mortgage of $200,000 at a fixed-rate of 3%, you’d pay approximately $946.49 monthly, and your total interest paid by the end of the mortgage would amount to around $83,947.30. In comparison, a 15-year mortgage would result in higher monthly payments of around $1,379.38, but a much lower total interest paid of $48,287.82. That’s almost half the interest.
A 30-year mortgage, on the other hand, would require a low monthly payment of $841.21, but would come with a much higher total interest paid of $102,833.90.
This is sample data. The rate you’re offered will depend on the loan term, the interest rate (fixed vs. variable, your down payment, credit score and income.
What are the benefits of a 25-year mortgage?
A 25-year mortgage offers a few useful benefits for homeowners, including:
More savings. Spending less on monthly mortgage payments could help free up your cash flow and help you live a more comfortable lifestyle. However, you’ll pay more in interest in the long run.
Minimize risk. Having a longer amortization period allows you to minimize the risk of any cash flow shortages. Should you lose your job or have financial difficulties, a lower monthly mortgage payment might save you from defaulting.
What should I watch out for?
Taking out a 25-year mortgage does have potential pitfalls:
Pay more interest. Since you’re paying smaller monthly payments, you’ll pay more interest over the life of the mortgage than you would with a shorter amortization period.
Build equity slower. Compared to a shorter-term mortgage, it takes longer to build equity and truly own your home with a 25-year mortgage.
Is a 25-year mortgage right for me?
A 25-year mortgage is the most common mortgage length in Canada and is usually a solid option. Although you’ll pay more interest over the life of a 25-year mortgage than you would with a 15-year mortgage, you can keep your monthly repayments low and enjoy a comfortable lifestyle.
A 25-year amortization period is also the longest mortgage length you can choose if you have an insured mortgage. Those with uninsured mortgages can choose amortization periods of 30- or 35- years.
If you’re looking to pay the least amount of interest that you can, you’ll want to choose a much shorter mortgage length than 25- years. Although you don’t want to be cash poor, you could opt for an amortization period of 15- or 20- years, or you could choose an open mortgage and make extra repayments each year to cut down your principal balance and ultimately pay less in interest.
Variable rate vs fixed-rate 25-year mortgages
Variable rate mortgages come with fluctuating interest rates that are not fixed for the mortgage term. A variable rate is typically expressed as the prime rate + or – a number. The prime rate can change based on the economy and is determined by the Bank of Canada’s overnight rate. While you might wonder why anyone would want to risk rising interest rates, a variable rate is usually fairly lower than a fixed-rate, especially for the first few years that you pay your mortgage. Over the life of the mortgage, a variable rate can save you a fair amount of money – if the prime rate stays competitive for the long run.
A fixed interest rate, on the other hand, will stay fixed for the term – whether that’s as low as 6 months or as high as 10 years. Once your term ends, you can refinance with the same lender or switch to another lender. A fixed-rate usually starts out higher than a variable rate, but may end up lower than the variable rate within a few years, again depending on the prime rate.
Which makes for the better choice depends on if you prefer knowing how much you’ll pay each month or whether you’re willing to take a risk on the prime rate staying low and competitive. What could be a better choice might be taking out a convertible mortgage, which allows you to reap the benefits of a low variable-rate for a few years and then switch to a fixed-rate mortgage once the prime rate rises. Another choice would be a hybrid or combination mortgage, which is usually a 50/50 combination of both a fixed-rate and a variable rate mortgage.
Which lenders offer a 25-year mortgage?
Most lenders, including banks, credit unions and online lenders, will offer 25-year amortization periods, as it’s the most common mortgage length in Canada.
If you want financial flexibility and don’t mind paying more in interest over the life of your mortgage, a 25-year amortization period may be right for you. If you have an insured mortgage – where your downpayment is less than 20% – a 25-year amortization period is the longest period you can choose anyway.
The amortization period is the total length of your mortgage, while a term is the length of time you lock in your rate and terms for. Once your term ends, which is typically anywhere from 6 months to 10 years, you’ll need to refinance your mortgage.
Yes, although 25-year amortization periods are the most common in Canada. You can get a 30- or 35- year mortgage, however you’ll need to pay at least a 20% downpayment, as insured mortgages cannot exceed 25-year amortization periods.
Unless your mortgage terms include a prepayment penalty, there’s nothing stopping you from paying off your 25-year mortgage ahead of time. With an open mortgage, you can typically pay up to 15% or 20% of your original mortgage balance each year without incurring penalties. Once your term expires and you need to renew your mortgage, you can also speak to your current lender about switching your amortization period or remortgage with a new lender completely.
Refinancing your mortgage to a shorter term is a great way to pay off your mortgage faster. Moving from a 25-year term to a shorter term will reduce the amount of interest you pay over the life of your mortgage. If you have an open mortgage, you can also usually pay up to 15% of the total mortgage amount each year without incurring any penalties. This can help lower the principal amount of your mortgage and ultimately save you in interest charges.
Variable rate mortgages often feature lower interest rates and monthly payments early in the term compared to fixed-rate mortgages. These mortgages can also allow you to take advantage of falling interest rates without the need for refinancing — but keep in mind that rates can rise as well, depending on the market.
Emma Balmforth is a producer at Finder. She is passionate about helping people make financial decisions that will benefit them now and in the future. She has written for a variety of publications including World Nomads, Trek Effect and Uncharted. Emma has a degree in Business and Psychology from the University of Waterloo. She enjoys backpacking, reading and taking long hikes and road trips with her adventurous dog.
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