Longer or shorter? Your amortization affects how much your mortgage really costs.

 

Shawn Kimber
RBC Mobile Mortgage Specialist
613-331-6556

 

Choosing the length of your amortization period, which means the number of years you will need to pay the full balance of your mortgage, is an important decision that can  affect how much interest you pay over the life of your mortgage.

Historically, the banking industry’s standard amortization period has been 25 years, a standard that still applies today. It is the benchmark that is used by most lenders when discussing mortgage offers.  However, shorter or longer time frames are available.

Why choose a shorter amortization period?
The main reason to opt for a shorter than standard amortization period is so that you become mortgage-free sooner. And since you are agreeing to pay off your mortgage in a shorter period of time, the interest you pay over the life of the mortgage is therefore greatly reduced.

You also have the advantage of building home equity sooner. Equity is the difference between any outstanding mortgage on your home and its market value. It represents the amount of money you can claim as your asset. If you choose, your equity can be used to secure lower interest cost financing for things such as home renovations, your children’s education or second property investments, just to name a few.

A shorter amortization period saves you money on interest.

While there are many good reasons to opt for a shorter amortization period, there are a couple of other factors to consider. Because you are reducing the actual number of mortgage payments you make to
pay off your mortgage, your regular payments will be higher.

So if your income is irregular, 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.

But, if you can comfortably afford the higher payments and 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, perhaps you should consider a shorter amortization period. The following chart will help you see the differences between shorter and standard amortization periods.

Compare the difference*: Five-year fixed-rate closed mortgage

Why choose a longer amortization period?
Choosing a longer amortization period can get you into your dream home sooner than choosing a standard or shorter period. When you apply for a mortgage, lenders calculate the maximum regular payment you can afford. They then use that amount to calculate the maximum amount they will lend to you for your mortgage.

As 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 over a longer period of time. So 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 end up in your dream home sooner than you thought possible.

Get your dream home sooner with a longer amortization. Regular payments are less with a longer amortization.

Again, this option is not for everyone. While a longer amortization period will appeal to many people because the regular mortgage payments can be comparable or even lower than paying rent, it does mean that more interest will be paid over the life of the mortgage. The chart below will help you to see differences between longer and standard amortization periods.

Compare the difference* : Five-year fixed-rate closed mortgage

You have the flexibility to shorten your amortization period. Regardless of which amortization period you select when you originally apply for your mortgage, it does not mean you have to stay with that period throughout the life of your mortgage. You can always choose to shorten the amortization period and save on interest costs by choosing an accelerated payment option, making extra payments when you can, such as a Double Up®** or an annual lump sum principal prepayment.

You should review your options at each renewal to shorten your amortization and pay off your mortgage faster.

It also makes good financial sense for clients to re-evaluate their amortization strategy every time their mortgage comes up for renewal. Then, as you advance in your career and begin to earn a better salary over time, you can simply increase the amount of your regular payments by as much as 10% once each year. All these prepayment features will take years off your amortization period, and save you money on interest.

Compare Interest Costs

 

 

 

 

 

 

 

For more information about mortgages, speak to Shawn Kimber, an RBC Mobile Mortgage Specialist

 

Attention all new home buyers!


So Christmas is over and you are getting itchy feet to start looking around at some homes.  Getting tired of your current accommodations and you need a place to call your own. Why not? Interest rates are still low and you’ve plopped some numbers into a handy mortgage calculator online and it appears that you should be able to get into something cheaper then you currenlyt have!

So, you hop in the car and start driving around the neighbourhood looking for something that catches your eye.  You see an open house sign in the distance, so you quickly drive over in anticipation to look at what this home has to offer!  Wow!! Okay.. this is a cool house and it is so big and has a great sized yard with a  POOL (albeit, all covered with snow)!!  Now you know you are definitely hooked and your pursuit to make this happen begins.

LET’S STOP THIS STORY RIGHT HERE!!

The picture, that i’ve painted, is how most new home buyers begin the course of looking for a new home.   But if this is all that you have done to prepare for this day then you may be in for a huge disappointment.  Buying a home can be described as an “INTENSE & EMOTIONAL ROLLER COASTER” and what we typically find is that most first time home buyers haven’t started the process to prepare for this day.

What do you mean “PREPARE” for this day?

According to a 2012 Nanos Research1 study, commissioned by CREA (Canadian Real Estate Association), found that more than 63% of respondents indicated a “major need” for more information about the financial details of buying a home. Does it surprise you to know that this number rose to over 70% when considering respondents between the ages of 18 and 29 only.

Buying a house requires a well laid out plan including an intense look at your finances.  This roller coaster ride is felt by both the buyer and seller and as Realtors we attempt to mitigate the causes of the ups and downs.  We engage the proper professional at the proper times to ensure a positive outcome.  Teaming up with the right mortgage professional can make the difference between you getting your home or not!

Chris Matthey, Mortgage Agent with The Mortgage Professionals, indicates that the biggest surprises to First Time Buyers normally have to do with their credit and/or with the realization of the total costs associated with buying and financing their first home.

“With credit, it is something most people do not check on a regular basis. As such, there could be a number of issues with their credit history and/or score that could negatively affect their mortgage application with potential lenders. By meeting with a mortgage professional early, these issues can be identified and rectified 


 As for the costs associated with buying and financing a home, First Time Buyers may have saved just enough for their 5% downpayment, but did not realize how much more they needed to save over and above their 5% downpayment. These costs include but are not limited to: legal fees, property tax adjustments, land transfer tax, title insurance, inspection costs, utilities set up, any many more. A mortgage professional can outline all these fees and costs to allow for proper planning and savings. This avoids the stress associated with having to come up with money last minute that the buyers did not plan or save for. “prior to the start of the buying process. 

As a realtor, we can certainly help to minimize the train wrecks and recommend a team of professionals at every step of the way.    As a buyer, your first step (if not your second) should be to find and talk with a mortgage professional that will take the time to map a plan to home ownership.

 

Additional Information:

HomeBuyers Road Map – CREA

It Pays to Know –  Federal Consumer Agency of Canada

Buying your First Home:  Three steps to successful mortgage shopping – Federal Consumer Agency of Canada



FOOTNOTES:

1 Survey conducted by Nanos Research and commissioned by The Canadian Real Estate Association. The survey was a random national telephone survey of 1000 Canadians aged 18 and over and is considered accurate ± 3.1%, 19 times out of 20.