Mortgage Amortizations

By Ryan Goldsman, CFP®, PAIP®

            Last week we discussed Canada’s stress test which led to an interesting question, and many interesting comments from readers: Why is the maximum mortgage amortization in Canada no more than 25 years?

            Although the standard has traditionally been 25 years, there was a brief period of time between 2005 and 2010 when mortgage amortizations rose from 25 years to 40 years, only to be reduced again to 25 years in 2012. The challenge faced by many Canadians (and the government) is their ability to renew their initial mortgage for a period of 20 years (after the first 5-year amortization). It would seem that many Canadians are facing a daunting challenge to continue with their original amortization periods.

            Clearly consumers are sending a message to the government and consumers may just win. Going back several years, the consumption of marijuana was strictly prohibited, and yet many continued to consumer the substance for a variety of reasons. Eventually the substance was tolerated for its medicinal purposes, and eventually it was legalized altogether.

            If it was a “showdown” between Canadians and the Federal government, clearly the consumers won. On the side of the Federal government, they have since benefited from the increase in tax revenues and the medicinal improvements for those who consume it.

            Dovetailing with legalization and higher tax revenues is the police now have one less thing to worry about, meaning their efforts can be focused on many more important issues.

            Coming back to mortgages, it’s clear that Canadians want longer amortization periods, and aren’t afraid to seek them out in spite of the government’s standards on mortgage amortizations. Clearly this needs to be addressed.

            Traditionally, the standard amortization period for a mortgage in Canada was 25 years. The conundrum which reared its head over the past few decades is that the average life expectancy of each Canadian has increased substantially. As a result, increasing the standard amortization period from 25 to 30 years may be the most rational decision. After all, it would account for the same proportion of one’s total life, especially now that we’re living longer.