Given that your home purchase and the subsequent mortgage used to finance the purchase are often the largest investment a person will make in their lifetime, people usually only focus on the interest rate and the term. As your St Thomas mortgage broker, obtaining a low interest rate for our clients is always an important goal, as is the term, however, what is often overlooked by clients is the mortgage amortization. The amortization is the length of time that it will take to pay off the mortgage, with the most common being 25 years which is the longest allowed for a high ratio insured mortgage.
What is a “normal” mortgage amortization?
If you make regular monthly payments as set out by your “standard” 25 year amortization mortgage will take you 25 years to pay it off, everything else being equal. Often people will set their amortization at 25 years just as a default and forget about it.
Can I shorten my mortgage amortization?
There are several ways that you can effectively shorten your amortization. When you shorten your amortization, your payment does increase however you are effectively paying yourself, as the interest component of a given payment stays the same however a greater amount of the payment goes towards the principal, reducing your mortgage balance. Because your principal has now decreased, your interest cost will also drop. Now your next payment will result in an even great percentage going toward paying off the balance.
What do you recommend?
As your St. Thomas mortgage broker, we generally recommend is to set your amortization to 25 years but also increasing your payment to reflect a lower amortization. This has the effect of paying off your mortgage quicker, with the flexibility of changing your payment back to the original amount if you ever need to. If you set your amortization lower from the beginning you won’t have the ability to lower the payment without actually rewriting your mortgage with a longer amortization.
It is always important to consider your options when setting up your mortgage. The downpayment, term and interest rate are certainly important but don’t forget to also consider the amortization. This will give you more flexibility and can also be used to pay your mortgage off faster and pay even less interest in the process. Reach out today to discuss your options!