An amortization period refers to the amount of time that is required to pay off your mortgage principal and interest expenses in full. However, you may have encountered different types of amortization schedules, including extended amortization, without fully understanding the meaning. Luckily, Orchid Financing is here to help!
What Are the Different Types of Amortizations?
In Canada, the average amortization period is 25 years. However, you can choose a shorter or longer amortization period. Until 2011, it was possible to have an amortization period of up to 35 years for high ratio insured mortgages. Unfortunately, this is no longer the case. If your mortgage is insured, then you are limited to choosing an amortization period of 25 years or less.
In certain circumstances, you may qualify for an amortization period of up to 30 years, and in some cases even 40 years. This is commonly referred to as an extended amortization. Insured mortgages are not eligible for extended amortization; the only way to qualify is by making a down payment of at least 20%.
How Your Amortization Period Affects Your Mortgage?
Before you choose an amortization schedule, it’s important to understand how different periods can affect the overall cost of your mortgage.
As you consider the monthly payment costs of your mortgage, keep in mind that a longer amortization period will mean more payments but also lower monthly payments. This can be beneficial for borrowers who need extra time to pay off their mortgage. However, you will also incur interest on more payments for a longer period, leading to a higher total interest cost across the lifetime of your loan.
Short amortization periods result in higher monthly payments but lower overall interest costs, whereas long amortization periods result in lower monthly payments but higher overall interest costs.
Pros and Cons of Extended Amortization
When choosing a mortgage, it is important to carefully consider your amortization period. This is the time frame over which you will repay the loan, and it can have a significant impact on the overall cost of your mortgage and your financial situation. Before deciding, you may want to consider the pros and cons of choosing an extended amortization period.
The Benefits of Choosing an Extended Amortization Period
Using an extended amortization period can provide you with many different advantages. Here are a few of the potential benefits that may be of interest to you:
Lower Monthly Payments: An extended amortization period can help you pay off your mortgage more slowly, spreading out the cost of your loan over a longer period. This results in lower monthly payments than you might have with a shorter-term mortgage, which can be helpful if you already have a lot of other bills to pay each month.
Increased Flexibility: As you extend your amortization period, you can make payments more frequently and adjust or reschedule payments throughout the lifetime of your loan. This can help you avoid unnecessary penalties such as pre-payment or late payment fees.
Convertible Options: If you’re not sure whether you want to commit to an extended amortization period, you may want to consider opting for a convertible amortization period instead. This type of mortgage allows you to begin with a shorter-term mortgage that can then be converted to an extended period mortgage if needed—without needing to refinance or renegotiate your mortgage.
The disadvantages of choosing an extended amortization period include…
While extended amortization periods can be advantageous, they may not be right for everyone. Here are some potential drawbacks to consider:
Higher Interest Cost: Because you will make a greater number of payments over the lifetime of your loan, you will also incur a greater total interest cost. Fortunately, some convertible amortization periods allow you to adjust your interest rate upon converting to an extended amortization period, to not increase your overall interest cost.
Longer Repayment Period: A shorter amortization period means that you will make larger monthly payments. This can help you build equity in your home more quickly than an extended amortization mortgage.
When Should You Extend Your Amortization?
To decide whether to extend your amortization period, you should consider whether or not you fit the necessary criteria. Here are some instances in which you are allowed to opt for an extended amortization period:
- You have made a down payment of at least 20% of the home’s value.
- Your loan-to-value ratio is no greater than 80%
- You are refinancing your home and are looking to change your terms.
- You need a lower monthly payment to qualify for the mortgage.
- You need the extra cashflow and would prefer paying less each month.
You can begin thinking about whether extended amortization is right for you once the criteria are met. Extended amortization may be a good option if you are having trouble making your monthly payments or if you want to lower your monthly expenses to free up cash for alternate uses.
Consult with an expert.
Not every lender offers extended amortization, so your mortgage broker will shop around on your behalf with different lenders before making a recommendation to you. Our Orchid Financing team can cross-reference our vast network of lenders to find the perfect match for you. We’ll help you decide if extending your current amortization period is right for you.
Reach out today to book your free consultation!