Canadian Parliament is floating longer mortgages as a housing fix—but does it actually improve affordability? An update from the Parliamentary Budget Officer (PBO) finds that stretching amortizations from 25 to 40 years lowers monthly payments, but borrowers end up paying 75% more in interest. The non-partisan agency also warns the analysis doesn’t account for broader consequences—ones that outweigh short-term benefits and undermine long-term housing and economic stability.
PBO: 40-Year Mortgages Lower Payments—But Cost 75% More In Interest
The PBO’s housing update follows a request from lawmakers on whether 40-year amortizations improve housing affordability. In this context, affordability means the maximum mortgage payment a household can make without exceeding a prudent debt service ratio (DSR). They use the CMHC’s 39% cap on gross debt as the threshold, but since that includes all carrying costs, the PBO reduces its threshold calculation to 32-35% of gross income.
Lower payments are the only goal, and extending amortizations is the most commonly pitched solution. It’s a simple premise: stretch repayments of a $1 million loan from 25 to 40 years—make smaller payments for longer. If you grew up in the 1990s, it’s a familiar strategy that you likely associate with late-night infomercials for Ginsu knives and George Foreman grills. The PBO confirmed this narrows the monthly payment affordability gap in major cities, but with a big catch: it comes at a significantly higher interest cost.
Their math estimates borrowers would pay 75% more interest by increasing amortization from 25 to 40 years. Payments are lower now, but far more income gets eaten by debt. The agency also cautions their analysis doesn’t account for shifts in demand, prices, credit risk, or rates. As a non-partisan organization, it receives very narrow questions that fail to appreciate the complexity of the situation. They chose not to comment on the factors excluded from the analysis, but left an important hint about the areas that are a much bigger risk over the medium-term.
Lowering Payments Artificially Erodes Affordability Even Worse
Extending amortizations works like lower interest rates—it delivers lower payments that help buyers accelerate their purchases with a smaller downpayment. This logic was promoted by central banks, discounting the influence of demand on prices—a central point to monetary policy. Sketchy or sloppy, your call.
When the Bank of Canada (BoC) studied the issue and presented its findings to financial professionals, it didn’t quite support the dogma repeated. They found lower payments (due to falling interest rates) only improved affordability briefly. Smaller payments helped buyers more easily absorb higher prices, fueling price growth. A few buyers paid less in the short term, but the net effect was higher home prices and worse affordability.
The BoC isn’t alone. The US Federal Reserve recently argued that lower payments didn’t improve affordability either. While recent rate hikes pushed payments higher, they found that affordability would have eroded even more without them. They go so far as to make the blasphemous claim—in this house of debt worship—that affordability isn’t just financing, but the actual price of a home as well. Gosh darn witches, we know.
Short-Term Affordability At The Expense of Long-Term Growth
Over time, the additional interest cost means less disposable income—money that would otherwise support productive economic activity. Instead, more spending is locked into non-productive sectors, further compounding Canada’s productivity problem.
Then there’s the cost of borrowing itself. Credit markets run on supply and demand, and ramping up credit consumption pushes up that cost. The response? Higher interest rates or higher inflation from monetary policy prioritizing political needs. A long-term problem fueled by short-term attempts to prop up home prices after a 60% national surge.
If groceries were unaffordable, would the solution be higher credit card limits and longer repayment terms? That’s essentially the logic behind stretching mortgage amortizations.