Understanding Mortgage Amortization
Could help your cashflow and savings rate…
The mortgage amortization period refers to the length of the overall mortgage, the amount of time it takes you to pay off the full cost of the home. As you go through the years, making mortgage payments, you’ll slowly be amortizing the property.
A normal Canadian amortization period depends on the size of the down payment you made and whether or not you had to purchase default mortgage insurance (less than a 20% downpayment), but amortizations are typically a maximum of 25 years for insured mortgages and up to 30 years for conventional mortgages. Canadians typically secure 5 year terms for their interest rate, and at the end of that five year period can renew their mortgage for another term until the end of the amortization.
The shorter the amortization for the loan, the higher the payment. You can have a 25 year amortization, which means you have agreed to pay back the loan over a maximum of 25 years, but you can control how fast you pay it off by accelerating your payments and using prepayment privileges provided by your lender.
In previous generations Canadians have focused on paying off their mortgage as quickly as possible, accelerating their payments and shortening their amortization. A lot of our parents, who were instructed by their parent’s generation subscribed to this philosophy.
In 2021, we have a very different landscape to base this financial decision on. Mortgage rates are historically low, and not 13-18%. Personal tax rates are higher, and the purchase price of a home is dramatically higher. In some cases homeowners have to stretch every penny for the purchase of a home.
For individuals that are not able to create savings at the end of every month, a look at your mortgage amortization may be a valuable tool. If you currently have 15 years left to pay off your mortgage and have debts and no monthly savings, a refinance consolidating debts and stretching out the amortization could create great monthly savings.
Keeping your amortization longer may also allow you to invest in RSP’s and take the refund and apply it to the mortgage. Having a longer amortization creates a lower monthly mortgage payment, which may assist in qualifying for a second home or rental property.
Mortgage contracts allow lump-sum payments and or increases of monthly payments as much as 20%. Understanding your contract so that you can pay off your mortgage so that you can maximize savings and reduce costs or invest is a valuable financial decision.
Mortgages are financial tools that can help you reach your goals.
A key to a great financial plan is understanding your mortgage and what your options are. Amortization is an important part of planning. Whether you want to accelerate your mortgage, purchase future investment properties or a cottage, understanding how amortization affects further financial decisions is an important step.