September 13, 2016

Choosing the right amortization period

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Paying off a mortgage sooner saves money, but it’s not possible for everyone

MORTGAGE MATTERS

BY KEVIN LUTZ

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

Historically, the standard amortization period has been 25 years. However, shorter and in some cases longer time frames may be available depending on the amount of down payment you have available. Note: If you choose an amortization over 25 years, you must have a down payment of at least 20 per cent.

A shorter amortization saves you money since you will pay less interest costs over the life of your mortgage.  With a shorter amortization, your mortgage payment will be higher than if you were to select a longer amortization, as more of your payment goes toward paying down your principal balance. The benefits are that you build the equity in your home faster and are mortgage free sooner.

Paying off your mortgage quicker through higher payments takes some discipline and is not easy, but remember that every little bit helps. When you make an extra payment against your mortgage, the interest is then calculated on a lower principal balance and you are therefore decreasing your amortization. Extra payments can now be done via on line banking, making it more convenient for you.

Some advice: 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.

A longer amortization provides you with lower monthly payments, and therefore is appealing to many people.  Choosing a longer amortization period can get you into your dream home sooner than if you were to choose a shorter period, since your payments are lower and therefore more affordable. However this does mean that more interest will be paid over the life of the mortgage and you will build the equity in your home at a slower pace.

You also have the flexibility to shorten your amortization period. Regardless of which amortization period you select when you originally applied for your mortgage, it does not mean you have to stay with it throughout the life of the mortgage. It makes good financial sense to re-evaluate your amortization every time you renew your mortgage.

As you advance in your career and begin to earn a better salary over time, you could choose an accelerated payment option or simply increase the frequency and amount of your regular payments. Both of these features will take years off your amortization period, and will save you money on interest.

Kevin Lutz is RBC Regional Sales Manager,
Residential Mortgages
 @RBCKevinLutz

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