Paying off a home is a cherished goal for many Canadians, yet with the average home price surpassing $655,000 and mortgage interest reaching a 22-year high, the dream of mortgage-free living is under scrutiny. In Canada, the conventional 25-year amortization period is evolving, with 63.5% of newly issued mortgages exceeding this timeframe (Residential Mortgage Industry Report from the Canadian Mortgage and Housing Corporation).
Navigating Mortgage Renewal: To extend or not?
As mortgages approach renewal, homeowners grapple with the decision of extending their amortization. New homebuyers also grapple with the choice of opting for the longest possible amortization.
Understanding Mortgage Amortizations
Your mortgage amortization, spanning one to 30 years, dictates the time it takes to fully repay your mortgage. The Office of the Superintendent of Financial Institutions regulates maximum amortization, setting it at 25 years for insured mortgages with less than 20% down payment and extending it to 30 years for uninsured mortgages with a 20% or higher down payment.
Benefits and Risks of Extending Amortization
From lower monthly payments to increased interest costs, understanding these factors is crucial for informed decision-making. In a landscape where mortgage dynamics are evolving, this blog aims to empower Canadians with insights into mortgage amortization, assisting them in navigating the complexities of homeownership in the current economic climate.
A Lenders vs. B Lenders
For those ineligible for prime lender mortgages, B lenders could be an option. Offering flexibility in qualifying standards and amortization periods up to 35 years, but you will typically need a downpayment of 20% or more to qualify. However, your mortgage interest rate is typically higher than that offered by an A lender for the same mortgage product.
Mortgage Amortization vs. Mortgage Term
Breaking down the relationship between amortization and mortgage term, and the trade-off between higher payments and lower interest over a shorter amortization period. Versus lower payments with increased interest over a longer term. The shorter your amortization period, the higher your mortgage payments, but you will also pay significantly less interest over the lifetime of your mortgage. On the other hand, the longer your amortization period, the lower your mortgage payments.
Pros of Extending Mortgage Amortization
Lower Monthly Payments
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- Example – For a $500,000 5-year fixed-term mortgage at 7% paid monthly, a 25-year amortization yields $344.47 less per month compared to a 20-year amortization, totaling $4,133.64 per year savings
Added Flexibility
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- Mortgages allow prepayment (up to 15% or 20% annually), empowering homeowners to pay extra when possible
- Prepaying during periods of surplus cash flow helps counteract increased interest due to a longer amortization
Enhanced Flexibility with Discipline
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- A longer amortization offers flexibility by allowing a lower contractual payment, but it demands financial discipline to voluntarily increase payments and reduce principal
Cons of Extending Mortgage Amortization
Increased Interest Payments
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- Results in higher total interest payments over the life of the loan, particularly if no prepayments are made
Requalification Requirement
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- It is considered refinancing, necessitating requalification for the mortgage, which can be challenging under changed financial circumstances
Extended Payoff Period
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- It prolongs the time required to fully pay off the mortgage, potentially affecting long-term financial goals
Extending mortgage amortization provides tangible advantages in reduced monthly payments and enhanced flexibility, countered by risks of increased interest, requalification challenges, and a prolonged payoff period. The decision to extend should be made judiciously, ideally timed at the end of the mortgage term, considering individual financial goals and circumstances. Discipline in managing the flexibility afforded by extended amortization is crucial for optimizing its benefits. Contact Us if you want to discuss if this is right for you.
Original Article – Forbes Advisor – November 16, 2023
