25 vs. 30 Year Mortgage: Best Choice for First-Time Buyers?

The changed scenario in the housing market of Canada can be pretty exciting and overwhelming for first-time homebuyers. Just recently, it has become possible to stretch mortgage terms up to 30 years. Although this can provide some flexibility in the management of the monthly payments, there is still a careful weighing of the advantages and the disadvantages that need to be considered also.

In this blog, your trusted partners at Sandhu & Sran Mortgages, will explore how extending your mortgage term can really affect you. We’ll also explore important considerations for first-time homebuyers: 25 years versus 30 years – all of which greatly affect your monthly payments, the costs in interest paid, and long-term financial planning.

What does a 30-Year Mortgage Mean for First-Time Homebuyers?

Traditionally, most Canadian homebuyers have opted for 25-year mortgage terms, which was the standard offering for many lenders. However, this could potentially make homeownership more affordable on a monthly basis if the term were allowed to extend further to 30 years. The following is the reason why:

• Lower Monthly Payments: With an extended period of amortization, this mortgage will take five years more to pay off so that it translates into lower monthly payments. This will be easier for the first-time home buyers to manage the cost of owning a home.
• Higher Purchasing Power: You may qualify for a bigger mortgage based on a lower monthly payment that would ease entry into Canada’s increasing pricey housing market, especially the cities of Toronto and Vancouver.

While the 30-year mortgage may make housing easier to afford in the short run, it has huge implications in the long run.

Some Demerits of a 30-Year Mortgage

Of course, the thought of paying less per month is tempting, but there are some real drawbacks to extending your mortgage over 30 years.

• Pay More Over Time: Extending a mortgage means that while you pay less per month, you will have paid much more in total interest at the end of the loan. A longer term means the lender collects interest over a longer period of time, which increases the total cost of the loan.
• Accelerated Equity Buildup: For an individual, a shorter amortization period will enable him to gather equity in a home much faster since more of every payment is used to pay off the main. Since it will take a 30-year mortgage longer to build up equity, this can be a negative if you are planning on selling or refinancing your home before the mortgage term is completed.
• Risk of Rate Hikes: If you choose the option of a variable-rate mortgage, then your payments would be on call for the Bank of Canada to hike interest rates, which would increase sometimes. Extending the term might leave you at the mercy of such rate hikes in the long term.

When Should You Choose a 30-Year Mortgage?

While a 30-year mortgage may work best for some first-timers, it clearly isn’t a one-size-fits-all situation. Here are a few situations where it makes sense to consider a longer mortgage term:

• Tight Budget: Let’s be realistic here-if your budget isn’t exactly huge and you’re concerned about being able to manage increased monthly payments, a 30-year mortgage may really ease your financial burdens and make the dream of homeownership much more affordable.
• High-Cost Housing Markets: For the buyer who may be on the high end of the scale in places like Toronto or Vancouver, where home prices are astronomical, extending the mortgage term may be a means of qualifying to get into a home in a competitive marketplace.
• Young Buyers: Younger buyers looking for that long-term investment and anticipating large increases in their future income may prefer to start with a 30-year mortgage that can help them during the transition period as their financial situation improves.

Ways to save on a 30-Year Mortgage

In case you use a 30-year mortgage, there are means of reducing interest in the long run:

• Pay Extra: Even small extra payments towards your mortgage principal will make an enormous difference in how quickly you’ll pay off the loan and also reduce your interest in the long run.
• Refinance Later. If your financial situation improves, then you may wish to refinance to a shorter term, getting a better interest rate, for example, which could save you thousands in interest over the life of the loan.
• Choose Biweekly Payments. Making biweekly payments instead of a regular monthly one actually nets you an extra payment per year, which can eliminate one year from your mortgage term and build in savings based on the interest paid.

Let’s take an example to understand.

The table compares a 25-year and a 30-year mortgage for a $500,000 loan at 5%. Although the sum to pay monthly will be more with a 25-year loan at $2,964.90, the total interest paid over the term will be $372,467.11; the overall cost for the mortgage will be low. In the case of the 30-year mortgage, although the monthly sums are at much lower rates, at $2,684.27, the total interest is much higher at $460,460.33 that will result in pushing up the total cost for the mortgage. The long term also has a short-term relief but pays out more interest over time.

Conclusion

A 30-year mortgage is also ideal for first-time homebuyers in Surrey regarding flexibility, but it comes with some risks as well. First, the monthly payments become much lower and more manageable, but it’s worthwhile to weigh the financial situation over a longer period. If you think of stretching your mortgage term, evaluate whether you would make extra payments; are you going to be severely impacted by the changes in the interest rates? Do you have long-term objectives in terms of managing your finances?

For tailored advice and customized mortgage solutions, contact Sandhu & Sran Mortgages agents in Surrey today. Their expert team can also help you navigate the refinancing process to make sure you find the best options for your needs.