Amortization

Amortization

‘Amortization’, another scary mortgage term...

…Do not fret!

The concept of amortization is actually quite straightforward.

Amortization is simply how long it will take you to pay off your mortgage according to your mortgage contract.

The length of amortization is agreed upon between you and your lender – a common amortization period is 25 years, but it can often take 30 years (or even 35 years depending on which type of lender you arranged your mortgage with).

'Amortization' Vs. 'Term'

The ‘term’ of your mortgage is also a measure of time, but only for a segment of your mortgage.

Where as the amortization period of your mortgage is the entirety of time it will take to pay it off, the term of your mortgage is the amount of time you are contractually committed to it.

Example:

• your amortization period may be 25 years (the length of time it takes to pay off your mortgage)
• your term may be 5 years (after 5 years your mortgage matures, and you may renew your mortgage contract)

When the term of your mortgage is close to maturing, it means a renewal is on the horizon! During your renewal, your licensed mortgage broker will assist you with re-evaluating whether restructuring your amortization period may be in your best financial interest.

If you would like to refinance your mortgage ahead of the maturity date, it may be a possibility, but it can come at a cost (pre-payment penalties).

How Amortization Affects Your Payments

Choosing a longer amortization period means your mortgage payments will be spread over more time, causing your monthly payments to decrease.

Great!

The reverse is true for a shorter amortization period. Less time to pay off your mortgage means you’ll be required to fit in higher payments each month.

So why doesn’t everybody choose a longer amortization period and enjoy lower monthly payments?

Your mortgage agreement is subject to interest by your lender. If it takes you longer to pay off your principal balance, it may end up costing you more as you’ll also be paying a greater amount of interest in the long-run.

Lots to consider!

Which Length of Amortization Should I Choose?

There is no one-answer-fits-all.

Each borrower’s mortgage needs are different from the next.

Your licensed mortgage broker will chat with you regarding your lifestyle and goals to determine which amortization will save you the most money/be the most suitable to your needs.

Not everybody benefits from lower monthly payments.

For example:

• If you have an above-average income with below-average expenses, you may not be concerned about lower monthly payments. For you, the goal may be an overall lower cost of borrowing regarding how much you pay towards your interest vs. principal balance
• If you’re income is average or below average and you have extra expenses such as children or advanced education, your goal may be to have lower monthly payments and a longer amortization period

Overall, a longer amortization period may cost you more in the long run, but it also means you’ll have the opportunity to build home equity along the way. Your investment in your home equity has potential to outweigh your interest costs from a longer amortization, it’s all a matter of subjective perspective!

How Your Amortization Period Is Determined

As with any decisions regarding your mortgage, your amortization period is a fine balance between what you would like to receive and what your lender is willing to give.

There are some aspects a lender may consider when assessing what amortization period they will approve:

• If your down payment is less than 20% (insured mortgage), you’ll likely be granted a maximum of a 25 year amortization (which is common for first time home buyers)
• Borrowers with a down payment of 20% or greater are often entitled to a longer amortization period
• Lenders may assess your credit score and credit rating, to determine your amortization period suitability

Reasons To Reevaluate Your Amortization

The financial market shifts every day, and your life is always changing.

Reassessing your mortgage and keeping in touch with your licensed mortgage broker are some of the best ways to ensure that you always maintain the best mortgage deal.

A few reasons you may want to restructure your amortization period are:

Negative Amortization Negative amortization may occur if you agreed to fixed payments with a variable interest rate, and the interest rates increased significantly.

If you pay a set amount per month towards your mortgage but your interest rate is free to fluctuate, you may be at risk for not covering the costs of your mortgage unless you restructure it.

In negative amortization, your principal balance actually INCREASES, meaning you may owe more on your home than the value of it.

Oof!

If this occurs, your licensed mortgage broker has your back and will investigate avenues which will once again see you paying off your principal balance, such as extending your amortization.

Shifting Income or Expenses As your income level/fixed expenses increase or decrease, you may feel more confident paying off your mortgage quicker, or be more comfortable requesting more time to make your payments.

Whatever the circumstance is, we’re here to help you make the most out of your mortgage. As licensed mortgage brokers, our experience within the industry can help guide you onto a successful financial path.

Unexpected Large Funds Have you received a large sum of money due to a work bonus, inheritance, or even by winning the lottery?

Lucky you!

It may be beneficial to make a lump-sum payment towards your principal balance; depending on whether your mortgage is open or closed, you may face pre-payment penalties by doing so.

Your licensed mortgage broker can help assess whether making a lump-sum payment (and decreasing your amortization period) is the best decision for you.

Need Help Deciding?

If you’re on the fence about whether choosing a shorter or longer amortization period is right for you, feel free to reach out.

I’m Kyle Benzies (licensed mortgage broker), and my experience within the borrowing industry will provide you with confidence over your mortgage decisions.

Your personal information will remain confidential every step of the way; you can rest assured you’re working with an ethical broker who has your best interests at heart.

To discuss your mortgage options, let's connect with a no-risk call!

***other conditions may apply to anything listed above. The information provided on this page should NOT be implicitly relied upon, and may not be 100% up to date. It's best to contact us for the most current conditions/program offerings for first time buyers***