Canadians looking to buy their first home now have more options when it comes to mortgages. Recent changes make it easier to take out a 30-year mortgage when buying your first home – but there are restrictions. Here’s a breakdown of the changes, and what to consider if you’re thinking about taking a 30-year mortgage to buy your first place.

First, it’s worth noting that 30-year mortgages have been available for ages.

30-year mortgages were available before the recent government changes. The tough part for new buyers was that a 30-year amortization was only an option if you had a 20% down payment or more when buying your home.

Unless you’re borrowing from the Bank of Mom and Dad, very few of us have that kind of cash available to buy our first house. You’d need $120,000 saved up to buy a $600,000 home with a 30-year mortgage, for example.

What’s Changed?

Under the new rules, you can now access a 30-year mortgage even if you’re only putting 5% down on your first home. A 5% down payment on a $600,000 home is just $30,000 – much more realistic for most Canadians.

But should you go for a 30-year mortgage? There are both benefits and drawbacks to the idea, so make sure to consider both.

Benefits of a 30-Year Mortgage

Lower payments. If you borrow the same amount of money and spread out the payments over a longer period of time, your monthly mortgage payments will be lower than if you took a shorter amortization, all other things being equal.

Flexibility. 30-year mortgages aren’t eligible for mortgage default insurance, which often translates to more prepayment options and breathing room in your terms and conditions.

Drawbacks of a 30-Year Mortgage

You’ll pay more in interest. The longer you keep your debt for, the longer interest has to accrue against it. If we take the $600,000 example, and assume a constant 4% interest rate to keep things simple, over a 25-year period you’d pay around $350,000 in interest, and your monthly payment would be $3,167.

If you were to change that time frame to 30 years, your monthly payment would drop to $2,864, but the total interest you’d pay would amount to over $431,000 – that’s over $80,000 more over the lifetime of your mortgage.

Of course, there are ways to reduce that interest, like making extra payments against your mortgage… but many Canadians don’t do that. You’ll need to weigh whether the lower monthly payments are worth the extra long-term costs.

You’ll be in debt for longer. This can make it harder to prioritize other things with your income, including saving for retirement. There’s also a psychologic impact to debt for many of us. It’s stressful, and can weigh on you. Taking a longer amortization means you’ll feel this weight for longer. For some, it’s no big deal… but if you’re not in that camp, this can be a major drawback.

Wrapping it Up

Ultimately, I’m an advocate for more choice for Canadians. However, I’m also an advocate of going in eyes-wide-open about the implications of these choices, and make sure that you consider the very real price tag that you’ll be paying in exchange for those lower monthly payments.

Is it worth it, if it means the difference between you being able to afford your first home or not?

Maybe… but I’d think long and hard about whether you might be cutting your finances too close to the razor’s edge after moving in.