Calgarians consider longer mortgage terms for lower payments

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Going longer for a lower payment is more in vogue these days in Calgary’s pricier home market. More buyers are seeking 30-year amortization mortgages than ever despite limitations on who qualifies versus the standard 25-year amortization.

“We are doing a lot of 30-year amortizations when the customer is eligible,” says mortgage broker Matt Leggett with Ratehub.ca in Calgary.

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“People seem to be more concerned about cash flow right now than getting the absolute best interest rate.”

For the most part, these are borrowers seeking to refinance or renew their mortgage terms, facing higher interest rates than they did when they got their previous mortgage before interest rates increased.

Yet some move-up buyers are seeking 30-year amortizations, which may provide more favourable monthly payments amid higher interest rates with the best five-year fixed terms at about 4.7 per cent versus two per cent or even less three to five years ago.

As well, Calgary’s resale real estate market has been on an upward tear with sales and prices growing significantly since the pandemic. Calgary Real Estate Board figures from April show sales were up about seven per cent year over year with 2,881 transactions — the third most for the month since 2010.

And the benchmark price increased nearly 10 per cent to $603,700 in April — exceeding $600,000 for the first time.

For single-family detached homes — the most in demand segment in the city — the benchmark grew 13 per cent to $749,000, another record high for price.

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That’s led some buyers to consider 30-year amortization to afford more easily a move-up purchase, a local realtor says.

“If a 30-year gets you from a semi-detached to a single-family detached home, it’s probably worth exploring,” says Mark Neustaedter, realtor with Exp Realty in Calgary.

Yet it’s likely a select group of buyers choosing to go in that direction, given they require at least 20 per cent for a down payment to get a 30-year amortization.

The Calgary market could see more first-time buyers selecting longer amortizations soon now that the federal government recently announced that 30-year amortization mortgages would be available for new home purchases, even with insured mortgages.

For those who qualify for the longer amortization, the monthly payments can be meaningfully lower, a recent Zoocasa Inc. study shows.

Realty firm compared the difference in monthly payments between 30-year and 25-year amortizations for five-year, fixed-rate mortgages with a 4.79 per cent interest rate. Then, it examined how these influenced affordability, based on the March benchmark price in 19 markets.

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In Calgary, the difference in monthly payments for a home priced $580,400 is $276 ($3,243 a month for a 25-year versus $2,967 a month). Yet the interest paid over the life of the mortgage is significantly more, the study reveals. Interest paid on a 25-year amortization would be $403,672 versus $498,887 for a 30-year mortgage, an increase of about $95,000.

In larger markets like Toronto, the monthly difference was much more sizeable, as was the total interest cost. In the Greater Toronto Area, where the benchmark price was $1,113,600, the monthly payment on a 25-year amortization would be $6,344 versus $5,804 for a 30-year amortization — a difference of $540 a month. Yet the interest cost on a 30-year mortgage would be $975,945 versus $789,682 on a 25-year, or about $186,263 more.

The significant increase in interest speaks to how borrowers must plan to limit long-term financial pain for the short-term gains in affordability, Neustaedter says.

“If you are going with 30 years, you need a plan to make lump-sum payments to get that principal down,” he adds.

“Otherwise, you may never get off the hamster wheel.”

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