How to Choose the Right Mortgage Amortization

Amortization is something people understand but don’t know how to apply. For this post, I am speaking solely about mortgage amortization.

The basics of amortization 

If you obtain a mortgage today, you can have a 25 or 30 years amortization period. The mortgage payment is calculated based on the amortization length in Canada, not the mortgage term.  If you purchase a home with less than 20% downpayment and require mortgage insurance, the maximum amortization is 25 years.

If you purchase a home with more than a 20% downpayment, you can amortize your mortgage for 30 years.

The longer the amortization, the lower the monthly payment. For example, if the mortgage terms are identical, a mortgage with 25-year of amortization will have a higher monthly payment than one with a 30-year amortization.

While the monthly payment is lower, the total interest paid will be higher the longer your amortization. In addition to higher interest costs, it will also take you longer to pay off your home the longer the amortization period.

What most people don’t understand about amortization 

People often pay little to no attention to their amortization. Most borrowers pay more attention to their mortgage terms. Your amortization is far more critical for determining the monthly payment you will pay per month. Remember, the longer the period of amortization you can have, the lower your payment, the higher your interest cost, and the longer it will take to pay off the mortgage debt.

It would be best to consider selecting the longest amortization available. For example, if your mortgage qualifies for 25-year amortization, you should choose that. If you are eligible for a 30-year amortization, you should select that. By choosing the max amortization, you get the lowest payment possible. In addition, you can also always re-amortize back to your initial amortization if difficulties occur in your life.

Amortize to the max but set payment to your desired amortization 

Mortgages and lenders are weird. If you get a mortgage that you initially set at 15-year amortization and, say, five years in, your financial picture changes, and you need to amortize it to the max of 25 years. It takes a lot of work and can involve new underwriting.

That’s why it’s more flexible and easy for you to take the max amortization and then set the payment based on a 15-year amortization. You accomplish your ultimate goal, but now, if something changes in the future, all you need is to call your lender and advise them you want to change your payment to your contractual payment. It’s a simple change in the bank system. No asking about income or if your life has changed.

While reverting your payments to your contractual payment, you now will have higher interest and will not pay off your home in 15 years. However, having this option provide you with more flexibility to deal with your financial challenges and you can revert payment to the original 15-year amortization when things are back to normal.

Take the max amortization available to you but set your payment based on a lesser amortization of your choosing to help you pay off your mortgage quicker and save on interest. It will make your life easier and make things easier for you and your life.