When it comes to monthly bills, there is no getting around the fact that your mortgage payments are going to be among the biggest. And it’s the amortization period on your mortgage that determines just how big these payments will be. This is why the amortization period is among one of the more vital details that you can discuss with your lender.
Whether you opt for a longer amortization period, where you pay less each month, but spend longer (and accumulate more interest paying it off) or you go the shorter route with the goal of saving more money, both options have benefits and drawbacks.
What Exactly is an Amortization Period?
Regardless of how much of a loan you take out, your loan balance will be “amortized” over a set number of years. Every monthly payment that you make goes towards paying off your principal portion, as well as interest. The longer your amortization period the more interest you pay.
Term vs Amortization Period
It is important that you don’t confuse your amortization period with your mortgage “term”. The term of your mortgage refers to the length of time that your mortgage remains in effect. Once that time expires, you’ll have to renew your mortgage at new terms, but your amortization period will remain the same unless you decide to actually refinance.
Short-Term Amortization Periods
Amortization periods that are only 5, 10 or 15 years in length are considered to be short-term. Because this is a shorter amortization period, the entire loan amount will need to be paid off in a quicker time period.
There are a few reasons why a lot of people opt for a shorter amortization period. The primary reason being that the financial freedom of completely owning your home comes so much quicker. Another benefit to a shorter amortization period is that it generally comes with a lower interest rate, saving the borrower a significant amount of money. In fact, signing up for a short-term mortgage can help you lock into a rate as much as one percentage point lower than a long-term mortgage.
Long-Term Amortization Periods
In Canada, the maximum amortization period for CMHC-insured home loans, those with less than a 20% down payment, is 25 years. For loans that were made with at least a 20% downpayment, the maximum is 30 years. In other words, if you can come up with a minimum 20 percent down payment on your home purchase, you may be able to qualify for a 30-year amortization period.
If your down payment is less than 20 percent of the purchase price of your home, the longest your amortization period can be is 25. The lower down payment is why longer amortization periods like 25 years are very popular among borrowers who may have tighter budgets to stick to. Lower monthly mortgage payments over a longer time period are especially beneficial for a lot of first-time homebuyers who may have even less money to play around with because they are just starting out.
The reality is that the choice you make between a short-versus a long-term amortization period comes down to your specific financial situation. If you have the finances to comfortably make higher mortgage payments, then perhaps a shorter amortization period might be a wiser choice, especially when you consider how much money you can save over the long run.
However, if you worry that your budget might not allow for higher payments, a long-term amortization might be better. While it may cost you more at the end of the day, your ability to make your payments on time every month is critical and is, therefore, a crucial factor to consider.
If you have any questions please do not hesitate to contact us 1800-472-9791
The Mortgage Centre – Sky Financial