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Mortgage Amortization

 

Get all the details on everyone’s favourite question: just what is Mortgage amortization anyways?

 

5 year fixed closed terms, closed mortgages, amortization. For the first time home buyer in Canada, these terms can seem at best foreign and at worst downright impossible. Online mortgage payment calculators, assume that you’ll be a mortgage amortization expert without ever properly explaining what mortgage amortization actually means.

 

So here’s what you need to know

Mortgage Amortization is the whole amount of time you’ll need to pay off your mortgage. With the current Canadian guidelines, if you have less than 20% down payment available, then maximum amortization period is 25 years (down from 30 just a short time ago). If you have 20% down (or more) then you can extend your mortgage amortization out to 30 years (there are still some lenders that will allow 35 years, but this is on a rare occurance).. So imagine that the Canada mortgage rates for a 5 year fixed closed mortgage is 3.4%, the principal is $300,000, and you want to be all paid off in 10 years. With this amortization period of 10 years, you’d have to be paying $2,949 per month. Once your 5 year term is over, you’d be left with a principal of $162,613 and would then be free to renegotiate your mortgage term. So hypothetically, for an amortization period of 10 years, you would need two 5 year fixed closed mortgages.

Seems simple enough right? But how do you choose whether to go for a shorter or longer mortgage amortization period? Can you afford 5 years? Is there really any difference between 25 and 30 years?

 

What is Mortgage Amortization

Be brief, be bright, be gone

Short mortgage amortization periods mean you pay less interest. However, a short mortgage amortization also mean significantly higher monthly mortgage payments. Talk with your financial adviser to see what maximum monthly payment amount you could afford, and then use that as a stepping stone to pick a suitable mortgage amortization period.

Even a 5 year difference in amortization can be significant in terms of savings. Looking at calculations, a $300,000 mortgage with a 5 year term, a 5.1% interest rate and 30 years amortization will be $142 less per month than a mortgage with the same terms except a 25 year amortization. The overall extra interest cost in the term will be about $1,155, and about $54,000 over the length of the amortization.

 

In it for the long haul

It is evident that you will save with the lower mortgage amortization, the less time it takes to pay your mortgage, the more you will save in interest. With that said, not all buyers can afford a larger monthly payment, especially first time home buyers in BC. So even though longer amortization periods do end up being more expensive, they can also give buyers the options to purchase something that they might not have had otherwise. In the end, it is always best to choose the mortgage that you can comfortably afford so that you can enjoy your new home without any added stress.

Plus, there are a few additional ways you can shorten your amortization period and pay off your mortgage faster, such as with the government-run First Time Home Buyers’ Tax Credit or with Tax Deductible Mortgages. No matter what you choose, with the Canadian mortgage rates being as low as they are (and not expected to rise in the near future), today is a great time to start thinking about being a first time home buyer in Canada. For tailored help and advice, talk to Aleem at The Mortgage Specialist. With his unparalleled knowledge of the West Coast market, he’ll help you realize your housing dreams faster.

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