Extended amortizations: How costly could they be in the long run?

While monthly payments would become more manageable due to extensions, overall mortgage costs will balloon, says Ratehub.ca

Extended amortizations: How costly could they be in the long run?

Extended amortizations will only lead to significantly higher mortgage payments, with overall mortgage costs likely to increase by nearly 180% over a 90-year timeframe, according to an analysis by Ratehub.ca.

The trend of dramatically extended mortgage amortizations has become particularly apparent over the past year, once the Bank of Canada began its interest rate hike campaign in early 2022.

“Following a historic nine rate increases implemented by the Bank of Canada between March 2022 and June 2023, the prime rate in Canada – the benchmark used by lenders to set their variable-product pricing – has risen from 2.45% to 6.95%,” Ratehub said in a new analysis.

This has pushed variable mortgage rates up from the record low of 0.85% in January 2022 to 5.8% currently. In terms of actual costs, borrowers would have seen their payments rise from $1,828 per month to $3,102 – $1,274 more,” Ratehub said.

Especially at risk would be borrowers who made home purchases on February 2022, who are now facing the prospects of “rapidly cooling housing prices and rising interest rates [whittling] away their equity in addition to inflating their mortgage costs.”

Calculating based on a theoretical principal amount of $500,000, and mortgage rate of 5.80%, monthly payments will amount to $3,161 for a 25-year term; $2,934 for 30 years; $2,494 for 60 years; $2,460 for 70 years; $2,441 for 80 years; and $2,430 for a 90-year amortization.

However, while monthly payments would become slightly more manageable due to these extensions, overall mortgage costs will balloon significantly. Ratehub said that total payments under this scenario would be $948,196 for 25 years; $1.056 million for 30 years; $1.796 million for 60 years; $2.066 million for 70 years; $2.343 million for 80 years; and $2.624 million for a 90-year term.