The amortization on a mortgage can change the amount of time to pay off the balance in full. Each mortgage payment you make helps to pay down the balance owing. The longer the amortization period the more time it takes to pay off the balance. Deciding which amortization period to go with could save or cost you thousands of dollars.
Lenders: maximum timeframe
An amortization period is the total length of time it will take you to pay off your mortgage. Often mistaken with the term of the mortgage loan. You can choose the length of time to payoff the loan or your lender can set it up for you.
Your down payment amount has a lot to do with the maximum amortization period.
- 20% down will get you the benefit of amortization period as high as 30 years.
- 5-19% down gets you a maximum of 25 years.
History on Canadian amortization (AM) periods
There was a time where you could get a 40 year amortization. Although 40 years may seem like a long time it helped get mortgages approved. Borrowers who had very little income could benefit from stretching the loan period out longer.
After some time passed the Canadian government changed rules from 40 years down to a maximum of 30 years today. With the reduced time frame people can still qualify for a mortgage but a slightly smaller purchase price.
What the data says
Past data shows that the mortgage amortization times have reduced. Depending on the age of a homeowner some will go higher and some lower.
Let’s say you have a $100,000 mortgage with a rate of 2.50% and a 30-year amortization period. The monthly payment would have been $394.45.
If you have a $100,000 mortgage at a rate of 2.50% and a 25-year amortization period; the monthly payment would be $447.97.
As you can see the difference in the payment is $53.52 per month. For some this could make or break qualifying for a mortgage.
Short vs. long term ‘AM’ length
We’ve always recommended borrowers take the longest amortization approved possible. Life happens and things can change. A longer time frame gives you the ability to reduce your mortgage payments, improve cash flow during an emergency and allows you to invest. Besides should financial hard times occur you don’t risk losing your home.
You can always increase your payments after your new mortgage is setup. By paying more you reduce the length of time to pay off the balance. Now you have the best of both worlds. Be sure to speak to your broker about the features of your mortgage.
My mortgage term is up now what?
I mentioned earlier mortgage terms carry renewal dates and with that comes a new interest rate. Whether it will be a higher or lower rate than your current one will be based on the market. This is key for the simple fact that if by chance you renew at a point when rates are higher than your current rate, you could end up paying more interest during the new term.
Paying more interest and less principal means extending the time to pay off the mortgage. Making extra payments will help in paying less interest even with a higher interest rate.
We’re here to help you figure out a plan that works for you.
If your looking for help give us a call today to learn about your options at 1-855-242-7732 or apply online now.
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