Choosing Your Mortgage 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.

The lending industry’s benchmark amortization period is 25 years and this is the standard that is used by lenders when discussing most mortgage offers.  In fact, this is the maximum available for all high ratio insured mortgages (equity of 20% or less). Shorter or longer timeframes are available – to a maximum of 35 years.

Advantages of Shorter Mortgage Amortizations
The most compelling reason to opt for a shorter amortization period is that you will become mortgage-free sooner and the total interest that you pay over the life of your mortgage is greatly reduced.  This shorter amortization also affords you the benefit of building up equity in your home sooner.

While this is obviously attractive, other considerations must be made before selecting your amortization. Payments on shorter amortizations are higher than the payments on longer amortizations.  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 broker will be able to help you choose the right amortization and ensure 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 Mortgage Amortizations
Deciding on a longer amortization period also has some advantages. For example, it can get you into your dream home sooner than if you select 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.  Being “maxed” out isn’t a comfortable feeling for anyone, but a little easier to swallow for those people knowing that their incomes will be increasing consistently and dependably as time goes by.

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 timeframe. 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 can end up in your dream home sooner than you thought possible.

Keep in mind, this option is not for everyone. While a longer amortization period has appeal because the regular mortgage payments can be comparable or even lower than paying rent, it does mean that you will definitely pay more interest over the life of the mortgage.

Regardless of which amortization period you select when you make your mortgage application, you do not have to commit to that period for the life of your mortgage. You can always choose to shorten your amortization and save on interest costs by increasing your payments, making extra payments when you can or even 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 broker can ensure the mortgage you select will not penalize you for making these types of extra payments.

It is also wise for you to re-evaluate your amortization strategy every time your mortgage comes up for renewal.  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). These strategies will take years off of your amortization period and save you a considerable amount of money on interest throughout the life of your mortgage.


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