Amortization
Selecting the length of your mortgage amortization period – the number of years it will take you to become mortgage free – is an important decision that will affect how much interest you pay over the life of your mortgage.
While the lending industry’s benchmark amortization period is 25 years, and this is the standard that is used by lenders when discussing mortgage offers, and usually the basis for mortgage calculators and payment tables, shorter or longer time frames are available – to a maximum of 35 years.
1. Please note the maximum amortization offered for high ratio (insured) mortgages is 25 years.
***High ratio mortgage is when the down payment is less than 20% or there is less than 20% equity.
2. Please note the maximum amortization offered for conventional mortgages by most lenders (ie major banks) is 30
years however a few lenders are still offering a 35 year amortization.
***Conventional mortgage is when the down payment is 20% or higher or there is 20% equity or more.
Advantages of shorter amortization
The main reason to opt for a shorter amortization period is that you will become mortgage-free sooner. And since you’re agreeing to pay off your mortgage in a shorter period of time, the interest you pay over the life of the mortgage is, therefore, greatly reduced.
A shorter amortization also affords you the luxury of building up equity in your home sooner. Equity is the difference between any outstanding mortgage on your home and its market value.
While it pays to opt for a shorter amortization period, other considerations must be made before selecting your amortization. Because you’re reducing the actual number of mortgage payments you make to pay off your mortgage, your regular payments will be higher. So if your income is irregular because you’re paid commission or if you’re buying a home for the first time and will be carrying a large mortgage, a shorter amortization period that increases your regular payment amount and ties up your cash flow may not be the best option for you.
Your mortgage professional will be able to help you choose the amortization that best suits your unique requirements and ensures you have adequate cash flow. If you can comfortably afford the higher payments, are looking to save money on your mortgage or maybe you just don’t like the idea of carrying debt over a long period of time, you can discuss opting for a shorter amortization period.
Advantages of longer amortization
Choosing a longer amortization period also has its advantages. For instance, it can get you into your dream home sooner than if you choose a shorter period. When you apply for a mortgage, lenders calculate the maximum regular payment you can afford. They then use this figure to determine the maximum mortgage amount they are willing to lend to you.
While a shorter amortization period results in higher regular payments, a longer amortization period reduces the amount of your regular principal and interest payment by spreading your payments out over a longer time frame. As a result, you could qualify for a higher mortgage amount than you originally anticipated. Or you could qualify for your mortgage sooner than you had planned. Either way, you end up in your dream home sooner than you thought possible.
You can always increase your payment to reflect a lower amortization. For example, you could register your mortgage based on a 30 year amortization but increase your payment right after completion to reflect a lower amortization (ie 25 years) as long as you are within your prepayment options. If for some reason you need to lower your mortgage payment in the future (for example 2 years) you can exercise this option as summarized below:
In this example your actual amortization is 23 years - 25 year amortization due to your payment increase right after completion less 2 years elapsed.
However you can lower your mortgage payment to reflect a 28 year amortization - original amortization of 30 years less 2 years elapsed in this case example
While a longer amortization period will appeal to many people because the regular mortgage payments can be comparable or even lower than paying rent (depending on the mortgage amount), it does mean that you will pay more interest over the life of your mortgage.
Still, regardless of which amortization period you select when you originally apply for your mortgage, you do not have to stick with that period throughout the life of your mortgage. You can always choose to shorten your amortization and save on interest costs by either increasing your regular payment and/or making extra payments when you can or an annual lump-sum principal pre-payment. If making pre-payments (in the form of extra, larger or lump-sum payments) is an option you’d like to have, your mortgage professional can ensure the mortgage you end up with will not penalize you for making these types of payments.
It also makes good financial sense for you to re-evaluate your amortization strategy every time your mortgage comes up for renewal (at the end of each term of your mortgage, whether this is three, five, 10 years, etc). That way, as you advance in your career and earn a larger salary and/or commission or bonus, you can choose an accelerated payment option (making larger or more frequent payments) or simply increase the frequency of your regular payments (ie, paying your mortgage every week or two weeks as opposed to once per month). Both of these features will take years off your amortization period and save you a considerable amount of money on interest throughout the life of your mortgage.
While the lending industry’s benchmark amortization period is 25 years, and this is the standard that is used by lenders when discussing mortgage offers, and usually the basis for mortgage calculators and payment tables, shorter or longer time frames are available – to a maximum of 35 years.
1. Please note the maximum amortization offered for high ratio (insured) mortgages is 25 years.
***High ratio mortgage is when the down payment is less than 20% or there is less than 20% equity.
2. Please note the maximum amortization offered for conventional mortgages by most lenders (ie major banks) is 30
years however a few lenders are still offering a 35 year amortization.
***Conventional mortgage is when the down payment is 20% or higher or there is 20% equity or more.
Advantages of shorter amortization
The main reason to opt for a shorter amortization period is that you will become mortgage-free sooner. And since you’re agreeing to pay off your mortgage in a shorter period of time, the interest you pay over the life of the mortgage is, therefore, greatly reduced.
A shorter amortization also affords you the luxury of building up equity in your home sooner. Equity is the difference between any outstanding mortgage on your home and its market value.
While it pays to opt for a shorter amortization period, other considerations must be made before selecting your amortization. Because you’re reducing the actual number of mortgage payments you make to pay off your mortgage, your regular payments will be higher. So if your income is irregular because you’re paid commission or if you’re buying a home for the first time and will be carrying a large mortgage, a shorter amortization period that increases your regular payment amount and ties up your cash flow may not be the best option for you.
Your mortgage professional will be able to help you choose the amortization that best suits your unique requirements and ensures you have adequate cash flow. If you can comfortably afford the higher payments, are looking to save money on your mortgage or maybe you just don’t like the idea of carrying debt over a long period of time, you can discuss opting for a shorter amortization period.
Advantages of longer amortization
Choosing a longer amortization period also has its advantages. For instance, it can get you into your dream home sooner than if you choose a shorter period. When you apply for a mortgage, lenders calculate the maximum regular payment you can afford. They then use this figure to determine the maximum mortgage amount they are willing to lend to you.
While a shorter amortization period results in higher regular payments, a longer amortization period reduces the amount of your regular principal and interest payment by spreading your payments out over a longer time frame. As a result, you could qualify for a higher mortgage amount than you originally anticipated. Or you could qualify for your mortgage sooner than you had planned. Either way, you end up in your dream home sooner than you thought possible.
You can always increase your payment to reflect a lower amortization. For example, you could register your mortgage based on a 30 year amortization but increase your payment right after completion to reflect a lower amortization (ie 25 years) as long as you are within your prepayment options. If for some reason you need to lower your mortgage payment in the future (for example 2 years) you can exercise this option as summarized below:
- Register mortgage based on a 30 year amortization
- Increase mortgage payment to reflect a 25 year amortization right after completion
- 2 years into the mortgage you would like to lower your mortgage payment
In this example your actual amortization is 23 years - 25 year amortization due to your payment increase right after completion less 2 years elapsed.
However you can lower your mortgage payment to reflect a 28 year amortization - original amortization of 30 years less 2 years elapsed in this case example
While a longer amortization period will appeal to many people because the regular mortgage payments can be comparable or even lower than paying rent (depending on the mortgage amount), it does mean that you will pay more interest over the life of your mortgage.
Still, regardless of which amortization period you select when you originally apply for your mortgage, you do not have to stick with that period throughout the life of your mortgage. You can always choose to shorten your amortization and save on interest costs by either increasing your regular payment and/or making extra payments when you can or an annual lump-sum principal pre-payment. If making pre-payments (in the form of extra, larger or lump-sum payments) is an option you’d like to have, your mortgage professional can ensure the mortgage you end up with will not penalize you for making these types of payments.
It also makes good financial sense for you to re-evaluate your amortization strategy every time your mortgage comes up for renewal (at the end of each term of your mortgage, whether this is three, five, 10 years, etc). That way, as you advance in your career and earn a larger salary and/or commission or bonus, you can choose an accelerated payment option (making larger or more frequent payments) or simply increase the frequency of your regular payments (ie, paying your mortgage every week or two weeks as opposed to once per month). Both of these features will take years off your amortization period and save you a considerable amount of money on interest throughout the life of your mortgage.