Canada is once again debating longer mortgage amortizations as a way to fix housing affordability. But a new analysis from the Parliamentary Budget Officer (PBO) warns the idea may create more problems than it solves. While a 40-year mortgage lowers monthly payments, borrowers end up paying 75% more interest over the life of the loan. The report also notes that the broader economic consequences were not evaluated, and those unaccounted factors may undermine long-term affordability even further.
PBO: 40-Year Mortgages Reduce Payments But Increase Borrower Costs
The PBO’s housing affordability update was prepared at the request of lawmakers who asked whether 40-year amortizations could help buyers qualify for more expensive homes. In this case, affordability is defined as the maximum payment a household can make while staying within a prudent debt service ratio.
The PBO uses CMHC’s 39% gross debt service cap as a reference point. Because that includes utilities and taxes, the PBO refines the affordability threshold to 32 to 35% of gross income for mortgage payments alone.
The logic behind longer mortgages is simple: stretch the repayment of a $1 million mortgage from 25 to 40 years and the monthly payments shrink. The PBO confirms that extending amortizations does narrow the monthly payment affordability gap in major cities.
However, the key trade-off is severe. Their calculations show borrowers end up paying roughly 75% more interest on a 40-year mortgage compared to a traditional 25-year repayment schedule. Monthly payments fall today, but far more income is lost to interest in the long run.
The PBO also warns that this narrow question does not account for major external factors such as price inflation, demand shifts, credit-risk changes, and interest rate responses. These omissions are significant enough that the agency hints a much larger long-term risk sits outside the scope of the question they were asked to answer.
Longer Amortizations Could Make Affordability Worse
Extending repayment periods lowers monthly payments in the same way falling interest rates do. Both give buyers more room to bid on homes with smaller downpayments. The problem is that lower payments tend to be absorbed by higher prices.
This is not theoretical. When the Bank of Canada studied the issue, it found that lower monthly payments only improved affordability temporarily. The relief allowed buyers to stretch further, which pushed home prices up. The final outcome was worse affordability despite lower payments.
The United States Federal Reserve recently published similar findings. They argue that while rising interest rates have pushed monthly payments higher, affordability would have deteriorated even more had rates stayed low. Their conclusion is straightforward: affordability is not just about financing, but also about the actual price of homes.
Short-Term Relief Could Harm Long-Term Economic Growth
Lower monthly payments may feel like a solution, but the long-term consequences can be significant.
More interest paid means less disposable income.
If borrowers are spending 75% more on interest over time, that is money diverted away from the productive economy. Instead of fueling businesses and innovation, a larger portion of income becomes locked into debt servicing.
More borrowing pushes rates higher.
Credit markets respond to demand. If millions of Canadians suddenly began taking on larger, longer mortgages, this increased credit demand can push up borrowing costs. That may lead to higher interest rates or a more inflationary monetary policy approach designed to protect economic stability.
The policy incentivizes higher home prices.
Stretching amortizations is essentially a strategy to make buyers comfortable paying more for homes after a 60% national price surge. It does not address the root problem: prices themselves.
A simple analogy: if groceries become unaffordable, the solution is not to increase credit card limits and stretch repayment terms. That may help today, but it guarantees deeper financial strain later. The same logic applies to 40-year mortgages.
What It Means for the Future of Canadian Housing Policy
The PBO’s analysis makes one point very clear: while a 40-year mortgage lowers payments, it does not make housing more affordable in a meaningful, sustainable way. It delays the symptoms while deepening the long-term cost.
With affordability already stretched, policymakers may look beyond quick fixes and consider strategies that address supply, productivity, and price stability instead of relying on longer debt terms.
Source: https://betterdwelling.com/canadians-would-pay-75-more-interest-with-40-year-mortgages-pbo/
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