Deciding on the Right Mortgage Term and Amortization Period
For many, the most confusing part of buying their first home is understanding the difference between a mortgage term and amortization period. In Canada, a typical mortgage has a five-year fixed-term with a 25-year amortization period.
That said, there is no one-size-fits-all approach, in fact, there are many factors a homeowner should consider when deciding what kind of mortgage term and amortization to choose.
How to Choose the Right Mortgage Term
Choosing the right mortgage term can be challenging, with terms typically ranging from six months to 10 years. The mortgage term is the length of time you commit to the current mortgage rate, the lender you chose, and the terms of the conditions.
The most popular mortgage in Canada is five years, but you can also get a mortgage term of one year, two years, six years, and 10 years. When you choose a mortgage term, you are locked in until the end of the agreed-upon period (or you can break your mortgage contract). What you commit to will mean you are either protected from rising rates or you pay more than you needed to.
At the end of the term, you will need to renew your mortgage on the remaining principle. Factors that will need to be reconsidered include frequency of payment, interest rate, and length of new term.
It’s important to understand the mortgage terms and what they mean for your bottom line. Choosing the right mortgage term can save you a lot of money over the lifetime of the mortgage.
Frequency of Payments
One of the biggest decisions you’ll make when you get a mortgage is how often you want to make your regular payments. There are actually six different payment frequencies you can choose from:
- Monthly (12 payments per year)
- Semi-Monthly (24 payments per year)
- Biweekly (26 payments per year)
- Weekly (52 payments per year)
- “Accelerated” Biweekly (26 payments per year)
- “Accelerated” Weekly (52 payments per year).
The accelerated options allow you to make extra payments against your principal; this will help you save on interest and reduce the length of time it takes you to pay off the entire mortgage. With accelerated payments, you make one extra monthly payment against your mortgage annually. But because the extra payment is spread out in small amounts over the course of the entire year, it’s easy to accommodate.
Length of Term
The length of the mortgage term you decide on will have a direct impact on the mortgage rate. Because borrowers want to save as much money as possible, they tend to lock into a longer term. A mortgage with a longer term provides more financial stability because the payments stay the same for the term of the mortgage. While this can provide peace of mind, you end up paying a premium.
Short-term mortgage rates are typically lower than long-term mortgage rates. That’s because it’s easier to predict where interest rates will be in the near term. It’s tougher to predict where interest rates will be five or 10 years down the road.
Some Canadian homeowners like knowing what their expenses will be. For others, a shorter term may be more attractive.
Choosing the Right Amortization Period
The amortization period is the length of time it will take you to pay off your mortgage in full. In 2008, before the recession, Canadians could get mortgages with amortization periods of 40 years.
All that changed after the recession and the U.S. housing market crash. In an effort to avoid the same issues in Canada, the Federal Government implemented a number of changes to Canadian mortgage rules.
Today, if your down payment is less than 20% of the purchase price of the home, the longest amortization period is 25 years. However, if your down payment is 20% or more of the purchase price, the maximum amortization period could be up to 30 years.
Choosing the amortization period that best suits your needs will determine how much or how little interest you pay during the life of the mortgage.
Shorter vs. Longer Amortization Periods
The most common amortization period in Canada is 25 years, but shorter and longer periods are available. Choosing a shorter or longer amortization period will depend on a number of different factors.
A shorter amortization period sounds great; you pay off the mortgage more quickly and pay less interest. A short amortization period is a great option for those who can afford higher monthly payments.
But it’s not for everyone. If you’re self-employed, your income is irregular, or you’re buying a home for the first time with a large mortgage, a short amortization period with higher payments that tie up your cash may not be the best option.
Most Canadians choose a longer amortization period because it lowers their mortgage payments. For some, this can be the difference between being able to buy a home and not being able to. Keep in mind, the longer the amortization period, the longer it will take you to pay the mortgage off, which means paying more in interest.
You’re never too young to start planning for your future and save. But when it comes to purchasing a home in Canada, you need to be the age of majority. In Alberta, Saskatchewan, Manitoba, Ontario, Quebec, and Prince Edward Island, the age of majority is 18. In British Columbia, New Brunswick, Nova Scotia, Newfoundland, Nunavut, the Northwest Territories, and the Yukon, it’s age 19.
If you’re not the age of majority in the province you live in, you can still purchase a house, you just need to have a co-signer that is the age of majority.
Canadalend.com, Helping Canadians Pay off Their Mortgages Fast
If you’re looking to step onto the property ladder and want to determine what kind of mortgage is best for you, contact the independent, licensed mortgage professionals at Canadalend.com.
The mortgage experts at Canadalend.com can help you find the best mortgage rates and determine the best mortgage term and amortization period to suit your financial and lifestyle needs.
How can we get you better financial products than the big banks? Unlike the banks, which only sell their own mortgage products (whether they’re right for you or not), the independent agents at Canadalend.com have access to hundreds of different lenders. As a result, we can help you find a mortgage that meets your long-term goals.
The mortgage brokers at Canadalend.com can also get you pre-approved for a mortgage or loan in 24 hours or less.
To see what kind of mortgage or loan you qualify for, contact Canadalend.com today or apply online and a Canadalend.com mortgage specialist will set up an appointment for a free personal consultation at your earliest convenience.