A shorter amortization period can help you pay off your mortgage faster and save you money. Obvious? Perhaps. So why are more and more people choosing to stretch their amortization as long as possible? The recent changes to Canadian mortgage regulations that limit amortization periods to 25-years have caused a bit of tension across the country as families scramble to manage increased payments.
However, at the end of the day, this restriction will go a long way to improving the pocketbooks of families from coast-to-coast. It wasn’t long ago that home hunters strove for shorter amortization periods in order to pay off their mortgage as soon as possible. As mortgage rules relaxed, so too did our dedication to frugality.
Ottawa’s new mortgage rules are intended to help us regain that focus and ensure thatwe avoid carrying debt into retirement.
Late Bloomers
Ottawa’s new amortization rules might seem a bit harsh, but the rationale behind them is actually pretty straight forward. Economic limitations have forced many young professionals to put homeownership on the back burner. As such, the age of the average first-time homebuyer continues to creep higher and higher. Imagine being a 35-year-old and amortizing your mortgage for another 35 – so much for retiring at 60! With the limiting of amortizations to 25 years, the current generation will be forced to better manage their money – which isn’t necessarily a bad thing.
The Cost of Time
Just how much money will you need to come up with in order to cover a 5-year amortization reduction? Surprisingly, not a lot. For every $100,000 of your mortgage (assuming the interest rate is 5 percent) your payment will only go up about $48 a month. Piece of cake, right? Increasing your payment by roughly $50 a month will also save you close to $17,000 in interest costs per $100,000 over your mortgages lifetime.
How to Choose the Right Amortization Period
Sometimes a borrower’s best interests aren’t always served by the shortest mortgage amortization. When selecting your amortization period, consider the following:
- Your budget – Could you comfortably afford your mortgage if rates increased by 2 or 3 percent?
- Your expenses – Is there a better use of your cash flow than simply paying off your mortgage?
Shorter amortization periods are designed to provide net savings only if you have no better alternative for the additional cash that you’re putting towards your payments. In some cases, paying off your mortgage sooner can actually cost you money. If putting more towards your mortgage causes you to deplete your contingency funds, you could be setting yourself up for failure.
Watch Out for Opportunity Costs
Certain types of property buyers need to pay extra attention to the opportunity costs associated with shorter mortgage periods. These include:
- Property investors (those who need to minimize payments in order to maximize cashflow)
- Self-employed home hunters (especially those that need the funds to reinvest into their business)
- Commission earners (those who need to build an emergency fund for leaner months)
- Families who have accumulated debt, are working to improve their retirement savings, or build education savings
How long should you amortize for? Ask a mortgage specialist from FamilyLending.ca! Their online mortgage experts can help you lock in the best mortgage rate available.