Wouldn’t it be nice to not have a need for a mortgage? Unless you’re selling your home and downsizing and moving to a lower-cost area, this reality may not be possible. So, if that’s the case, and you DO need a mortgage, the question you might have is “Should you go for a longer mortgage amortization term, or a shorter one?”

First off, what does the term “Mortgage Amortization” mean?

Mortgage amortization refers to the length of time you will be paying off a mortgage. If you want to get technical the term “amortization” refers to the gradual repayment of a debt over time through a series of regular payments and the term mortgage, is just a name for the type of loan is it.

How does mortgage amortization work?

In the context of a mortgage, the process of amortization involves you making regular payments to the lender, which are divided into two parts: the principal and the interest. The principal is the amount borrowed, while the interest is the fee charged by the lender for lending the money.

Each monthly payment is made up of both principal and interest until all the interest on the loan has been paid at which point you pay just the principal owing. At the beginning of the loan, the majority of the payment goes towards paying the interest, while a smaller portion goes to reducing the principal. Over time, as more of the principal is paid off, the portion of the payment that goes toward the interest decreases, and the portion that goes toward the principal increases.

This process continues until the loan is fully paid off, at which point the borrower owns the property free and clear. Mortgage amortization schedules show the breakdown of each monthly payment over the life of the loan, and can be useful in helping you understand how much of your payment is going towards interest versus principal so you can manage your regular cash flow accordingly.

How long is the average mortgage amortization in Canada?

The length of a mortgage amortization can vary depending on the specific terms of the mortgage. The most common length for a mortgage amortization schedule is 25 years but can be shorter.

What’s the main difference between a shorter vs a longer mortgage amortization period?

The length of the mortgage amortization can have a significant impact on the total amount of interest paid over the life of the loan. A longer amortization period will result in lower monthly payments, but also means paying more interest over the life of the loan. On the other hand, a shorter amortization period will result in higher monthly payments, but less interest paid over the life of the loan.

What are the pros and cons of having a shorter amortization period?

Shorter mortgage amortization periods can have both advantages and disadvantages.

The Pros:

1. Lower overall interest payments: With a shorter amortization period, you will pay less interest over the life of the loan, resulting in substantial savings.
2. Faster equity buildup: By making larger payments towards the principal, your home will build equity more quickly.
3. You own your home faster: As you pay off the loan sooner than you would with a longer amortization period, you are free and clear of that loan sooner.

Cons:

1. Higher monthly payments: Shorter amortization periods require larger monthly payments, which may be difficult financially for you to manage regularly.
2. Less flexibility: The higher monthly payments of a shorter mortgage amortization period can make it more difficult to handle unexpected expenses or financial setbacks should they occur. For example, most of your income per month may be going straight to your mortgage. As such you will want to make sure you have a “rainy day” fund for unexpected costs like a new roof, or a flooded basement. (To create that fund put your money in a tax-free savings account to help you save on a regular basis.)
3. Higher-income requirements: Lenders will require you to have higher income levels to qualify for a shorter amortization period. Working with a mortgage broker can help you make your mortgage application more attractive to lenders so that you can qualify for a shorter amortization period paying out less interest.

Overall, a shorter mortgage amortization period can be a good choice for you if you have the financial means to make larger monthly payments and are looking to build equity in your property more quickly.

What are the pros and cons of having a longer amortization period?

Pros:

1. Lower monthly payments: With a longer amortization period, the monthly payments are spread out over a longer period, resulting in lower monthly payments that may be easier for you to manage.
2. Greater flexibility: Lower monthly payments will provide you with more flexibility to handle unexpected expenses or financial setbacks that may happen.
3. Lower-income requirements: Lenders may accept lower income levels making it easier to qualify for a mortgage with a longer amortization period.

Cons:

1. Higher overall interest costs: A longer amortization period means more interest is paid over the lifespan of the loan, resulting in higher overall costs.
2. Slower equity buildup: Lower monthly payments mean that you will build equity in the property more slowly.
3. Risk of negative equity: If property values decline or if you owe more than the property is worth, a longer amortization period can increase the risk of negative equity.

So, should you pick a shorter or longer mortgage amortization period?

Overall, a shorter mortgage amortization period can be a good choice for you if you have the financial means to make larger monthly payments and are looking to build equity in your property more quickly. A longer mortgage amortization period can be a good choice for you if you need lower monthly payments to manage your cash flow. You should carefully assess your financial situation and long-term goals before choosing a which amortization period to ensure you are making the best financial decision for you specifically.

Working with a mortgage broker, like myself, Darren Robinson is your best bet when trying to decide how long your mortgage amortization period should be. I can help you with your mortgage application and ensure you’re making the best financial decision when it comes to which lender you apply to, which type of mortgage you choose, and what mortgage options are included. My goal is to make sure you feel confident and comfortable with your decision while striving to get you the lowest mortgage rate possible. To get started, give me a call at 705-315-0516 or sign up for a free no-obligation consultation here to learn more about how I can help you get pre-approved for a mortgage as soon as possible.