As the market becomes less stable, insurable amortization periods have been shortening. The Canadian Mortgage and Housing Corporation (CMHC) has been Canada’s authority on housing for more than 65 years, offering objective housing research to Canadian governments, consumers and the housing industry. One of their cornerstones is prudent risk management. When the CMHC predicts a disaster on the horizon (such as a housing market crash) they tell everyone what’s coming, and how to stop it. This promotes the installation of safety measures to make sure that the worst doesn’t happen.
It used to be easy to get a mortgage with an amortization period greater than 25 years. Before 2011, amortization periods as long as 35 years were obtainable. However when a housing market crash was looming, the Canadian government proposed and passed motions to cool an overheated market. In 2012, it was declared that the maximum amortization would be reduced to 25 years.
With a 25 year amortization period, you’re making larger monthly payments and reducing your total interest payable faster. A shorter amortization also means that your saving behaviour is positive. 30 year amortization periods are still available, but they’re lender specific. The CMHC won’t insure amortization periods that exceed 25 years. This makes the lender more susceptible to loss, which leads to higher interest rates for the borrower. As with any loan, it’s clear that the faster you pay it off, the more money you save on interest.
If you choose the maximum amortization period of 25 years, you can still decrease the time it takes to pay off your loan by increasing your payment frequency. When it comes down to payment options for that amortization, you have three: monthly payments, bi-monthly payments(twice a month), or bi-weekly payments (every two weeks). Believe it or not, bi-monthly and bi-weekly are really different kettles of fish. The difference between the two can save you thousands of dollars in interest and help you pay your mortgage off years earlier.
For example if you choose a payment frequency that is bi-monthly, you’ll be making 24 payments a year (2 per month). With bi-weekly payments, you will be creating space for two extra payments a year, because there are 52 weeks in a year– and divided by two, this equals 26 payments with a bi-weekly plan vs. 24 semi-monthly payments. It’s highly recommended that you make bi-weekly payments if you can, because the savings are huge – and your amortization can actually shrink in years because you’re paying down your principle faster and accumulating less interest.
If we use the example of a $200,000 mortgage at 5% interest per annum and compare bi-monthly payments to bi-weekly payments you can see just how much difference a couple extra weeks of payments can make:
Bi-monthly payments on a $200,000 mortgage = $1,163.21 per payment – 2 times per month – over 25 years means that you would pay $148,962.99 in interest over the 25 years.
Bi-weekly payments on a $200,000 mortgage = $581.60 per payment – every 2 weeks – shortening your amortization period to 22 years opposed to 25 years, which means you would only pay $124,094.94 in interest over the 22 years.
That’s a savings of $24,868.05!
If two extra payments of $580 a year can save you almost $25,000, imagine how much interest you’re saving, when you choose a shorter amortization period altogether? The longer you remain in debt, the higher the debt will cost as each year goes by. The government may have limited the maximum amortization to 25 years, however this isn’t necessarily a restriction. If you look at it from a financial perspective, it actually means an earlier freedom from paying interest rates that only get higher, when you take more time to pay everything off. A longer lifetime is desirable – but when it comes to the life of your mortgage, shorter is better.