Mortgage Amortization Explained
Houses aren’t cheap. In all likelihood, you’ll need the help of a mortgage to afford one – even if you bought a bunch of bitcoins in 2012 and haven’t touched avocado toast in years.
But mortgages can be intimidating, in no small part because of the jargon that surrounds them. We’ve put together this article to help demystify one of the terms you’ll want to know before you sign on the dotted line: mortgage amortization.
Amortization is a big word for a fairly simple concept. In short, it refers to the process of paying off debt in regular instalments on a fixed schedule. If you’ve had the pleasure of making student loan payments, you get the idea. When it comes to mortgages, however, there’s an important distinction to be made between amortization and term – a distinction which can drastically impact the total amount you pay for your new home.
Mortgage Term vs. Mortgage Amortization
Mortgage term describes the length of time you are bound to a particular rate and lender. When a mortgage term expires, you must either renew the existing contract or select a different lender to cover the remaining balance. Think of it as your chance to hit the reset button.
Mortgage amortization, on the other hand, describes the length of time it will take you to pay off your mortgage in full based on your monthly payments.
The maximum mortgage amortization period available in Canada is 25 years. But don’t be too quick to opt for the longest term possible. Yes, your monthly payments will be lower, but you will pay significantly more interest in the long run.
Say, for example, you made a $25,000 down payment on a $500,000 home, and mortgaged the remaining $475,000 for an amortization period of 25 years. Assuming the interest rate remained fixed at 3.34% and you made monthly payments of $2,332, you would pay roughly $224,000 in total interest. Now, compare that to an amortization period of 15 years for the same loan. Your monthly payments would be higher at $3,353, but you would pay only $128,000 in total interest.
Do those numbers look a little intimidating? You’ll want to ensure your finances are in order before you take the plunge and purchase your new home. A finance professional like Ramona Holm, CPA, can help. Reach out today to request a free consultation.