A common word heard when discussing mortgages is “amortization”. Basically, the word refers to the time period in which it will take you to repay your mortgage in full. So, how do different amortization periods affect you? Due to interest, it goes without saying that the longer the amortization period, the more you end up paying in total because of the on-going interest fees. Let’s take a look at the different terminology, their meanings and how that affects you as the mortgage holder to answer a few questions you might already have.
How Far Can You Stretch It?
While there is no technical minimum amortization period, many lenders use a hypothetical minimum of 5 years. However, there is a national maximum. As of 2012, the maximum amortization period in Canada is 25 years. Some people opt for a longer amortization period because it allows for lower mortgage payments each month, which for some, can mean the difference between owning a home or not. However, the longer it takes to pay the loan back, the more interest there is accumulated in the total cost.
Rule of 28
Typically, your mortgage broker will suggest that you base your mortgage on the Rule of 28. This guideline states that you should spend no more than 28% of your income on housing, which includes mortgage payments, insurance and property taxes combined.
To get a better idea, take a look at these hypothetical income brackets and the suggested monthly housing cost limit.
Annual Income Monthly Housing Limit
Term VS Amortization
Often the words “term” and “amortization” get their definitions confused when dealing with mortgages, but in fact the two words are quite different. While, as you now know, an amortization is the time period in which you repay your mortgage loan. However, a term is actually the length of time that your mortgage agreement, at your agreed interest rate is in effect for. This means that you could choose to refinance, adjust or renew the terms of your mortgage and its interest rates every 1, 2, 3 or 5 years when it renews according to your term length. Often this kind of re-grouping on a mortgage agreement is useful because you’ve made a change to your annual income and available funds, or as some lucky mortgage holders find, the market rates have dropped significantly and you’d like to renegotiate your rate to benefit from the savings in interest.
Understanding all the terminology and the meanings behind words associated with mortgages is no easy task. That’s why I’m here! I’m always happy to explain any aspect of the mortgage process to help you better understand where your finances are and to help keep you on track, building a solid financial foundation for you and your family. If you have any questions or concerns, please don’t hesitate to give me a call at 705-315-0516.