When you talk about the amortization period of a mortgage, you are referring to the length of time it takes to pay off your mortgage. Deciding on the amortization period is an important decision that could cost or save you tens of thousands of dollars.
Each mortgage payment you make goes to paying down the principal mortgage and interest. The interest is what you pay to the lender for the privilege of borrowing their money. The rest of the mortgage payment goes to pay down the principal balance of the loan.
The longer the amortization period, the more you pay in interest. The shorter the amortization period, the less you pay in interest. There is a tradeoff though, the shorter the amortization period the higher the monthly mortgage payments.
Historically, the most popular amortization period is 25 years. But the amortization period can be longer or shorter depending on how much of a down payment you have.
What’s the Difference between Amortization and a Mortgage Term?
One of the most confusing aspects about the home buying process is the difference between the amortization period and the mortgage term. For example, a so-called typical mortgage in Canada has a 5-year term with a 25-year amortization period.
As already discussed, the amortization period is the length of time it takes to pay off the mortgage. The mortgage term is the length of the mortgage rate, lender, and associated mortgage terms and conditions you commit to.
When the five-year mortgage term is up, the mortgage rates are basically reset. When the mortgage term ends, you renew your mortgage on the remaining principle at a new rate. If interest rates have gone up since you signed your first term, you’ll be paying more in interest.
How Much Can You Save with a Shorter Amortization Period?
How much money can you save with a shorter amortization period? Below are two scenarios.
Let’s say you have a $150,000 mortgage with a five-year fixed rate term of 4.0% and 25-year amortization period. According to the most recent data, the monthly mortgage payment would be around $789.00. Over the full 25-year amortization period, you would pay $86,707.00 in interest.
If you had a $150,000 mortgage with a five-year fixed rate term of 4.0% and 30-year amortization rate, the monthly mortgage payment would be close to $715.00. Over the life of the 30-year amortization period, you would end up paying $106,779.00 in interest.
The longer 30-year amortization period reduces the monthly mortgage payment by $74 but you pay an additional $20,072.00 in total interest.
Can I Reduce or Extend the Amortization Period of My Mortgage?
You are not stuck with the original amortization period you selected when you originally applied for your mortgage. In fact, it’s a good idea to reevaluate your amortization period every time the mortgage term ends and you renew your mortgage.
Nowadays, more and more Canadians are choosing longer amortization periods. After all, a 30-year amortization period can cut your monthly mortgage payment by about 10%; but it can also add more than 20% of interest costs over the life of the mortgage.
There are lots of reasons why Canadian home buyers are taking out longer amortizations. Rising home values is one big reason; over the last ten years, national home prices have increased more than 70%.
Unfortunately, wage growth has been stagnant. Over the same time frame, earnings have risen just 23%. If your wages are not keeping pace with the increase in housing prices and you want to get on the property ladder, you need to consider a longer amortization period.
While the maximum amortization from big banks in Canada is generally 35 years, some non-traditional lenders still provide amortization periods of 40 years. Private lenders can provide these better options because they are not bound by the same stringent rules set forth by the Federal Government.
Does Amortization Impact Mortgage Interest Rates?
No. The amortization period has nothing to do with interest rates. You choose an amortization period when you are approved for a mortgage. The Bank of Canada is in charge of interest rates. While amortization does not impact mortgage interest rates, the reverse is certainly true.
When interest rates go up, Canada’s big banks and trust companies raise their prime lending rates with impacts mortgages and other interest-bearing loans. Interest rates are currently on the rise and the Bank of Canada has said it will continue to raise rates for the foreseeable future. This means it is going to cost more money to borrow and cost more to carry debt.
The Benefits of a Longer Amortization Period
Whether it’s a residential or commercial mortgage, there are a lot of benefits to having a longer amortization period.
For starters, a smaller monthly mortgage payment means you can put that cash to better use elsewhere. This is especially true for those who are self-employed and have unreliable cash flow. A longer amortization period is also a good idea if you want to pay down high interest credit card debt.
A lot of Canadians like how flexible a longer amortization is because they know they can reduce amortization period whenever they like, by simply making a prepayment.
Canadalend.com, Helping You Find the Best Mortgage with the Best Terms
Whether you’re looking to secure a mortgage or want to refinance a mortgage with the best terms and rates, the licensed mortgage specialists at Canadalend.com can help you choose the financial product and amortization period that best suits your long-term financial and lifestyle needs.
How can Canadalend.com provide you with better financial products and services, freedom, and flexibility than traditional lenders? Unlike the big banks, which only push their own mortgage products, even if they’re not right for you, the mortgage experts at Canadalend.com are independent.
We have access to hundreds of different lenders. Lenders that specialize in helping homebuyers or homeowners looking to refinance secure a loan with an amortization period that fits your needs.
To find a mortgage with the best rates and amortization period, contact Canadalend.com today or apply online and a Canadalend.com mortgage specialist will set up an appointment at your earliest convenience.