When it comes to a mortgage, should I choose a long or short amortization? | Refresh Financial

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When it comes to a mortgage, should I choose a long or short amortization?

amortization length for a mortgage

A mortgage is a serious commitment, no matter where in Canada you’re planning to buy a home. The majority of mortgages take 25 to 30 years to pay back completely, which is why it’s so important to be prepared before you sign on the dotted line - a mortgage is not a short-term commitment. That being said, buying a home can also be one of the most gratifying goals to cross off your list and will be well worth the time and money you’re committing.

So, when it comes to choosing how long you want to amortize your mortgage for, should you go long or short?

What Does Amortization Mean?

“Amortization” refers to the amount of time that it takes to pay off your mortgage in full. The total length of your amortization will depend on several factors, including how large your down payment is, as well as how expensive and how frequent your mortgage payments will be. The larger down payment you save up and the more frequent your payments, the shorter your amortization period will be.

Federal Amortization Rules

While your lender will allow you to have some input when it comes to choosing the length of your amortization, there are certain rules that need to be followed. Especially if you’re interested in a longer amortization.

As of July 9, 2012, the maximum amortization for all insured or high-ratio mortgages  is 25 years. This means if you have a down payment of less than 20% and therefore are required to have CMHC mortgage insurance, the maximum amount of time you can amortize your mortgage for is 25 years.

Keep in mind that if you have a conventional mortgage because you were able to put down 20% or more, lenders may be willing to amortize your mortgage for longer.

How Long Should I Amortize My Mortgage For?

Knowing exactly how long your mortgage amortization should last can be tricky, as this decision will depend greatly on your own level of financial stability, meaning what you can comfortably afford over the life of your mortgage.

Longer Amortization

For many homebuyers, it’s more affordable to stretch your mortgage out for as long as possible through lower or less frequent payments, a smaller down payment, and a longer overall amortization. By saving a bit of money initially, this would theoretically make it easier to afford your mortgage payments as well as any other regular expenses. Then again, remember that the longer your amortization is, the more interest you’ll be paying overtime which will increase the total cost of your home and keep you in debt longer.

Shorter Amortization  

So, would a shorter amortization be better? It certainly can be, under the appropriate circumstances, as you’ll pay less interest and be out of debt sooner. However, if your mortgage amortization is shorter, your mortgage payments will be higher. Depending on your financial situation, this may not allow you to afford both your mortgage payments, the cost of owning a house, and all your other regular expenses. This could ultimately lead to debt issues down the line.

What About Making Extra Payments?

For those consumers who are committed to paying down their mortgage, the idea of making extra payments  may be very appealing. Extra payments, often referred to as prepayments, would not only shorten your amortization and therefore allow you to become debt free sooner, but will save you on interest in the long run.

Prepayment privileges are determined by the lender. This means that you can’t simply decide to make an extra payment one month like you might if you were trying to pay off credit card debt. Typically prepayment privileges consist of either increasing your monthly payments or making a one-time lump sum payment. It’s important to note that prepayments often come with fees and penalties that could out weight any benefits.

Consider Your Financial Health First

While buying a home can be a major goal to accomplish, committing to a mortgage is a serious investment and must be carefully considered before you make your decision. Remember, as a prospective homeowner, every penny counts, and the amortization period you choose should rest largely on where you are financially. Therefore, finding a lender with the best rates and mortgage payment options should be a top priority for you.

If you need help building your credit before you can qualify for a mortgage in Canada, check out the programs Refresh Financial has designed especially to build credit, while also saving for a down payment for a house!


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