16 Sep 2015
What Amortization Should I Have On My Mortgage?
Short answer: the longest possible amortization you can get!
However, the goal is to get the longest amortization possible, but then increase the payment or make lump sum payments to move the amortization to the lowest possible and therefore be mortgage free faster. I will explain more later.
Amortization is the total authorized repayment period of a mortgage. If you have a hi-ratio mortgage, by law – government guidelines, the maximum is 25 years. However, if you have a conventional mortgage or, in other words, at least 20% down or 20% equity, then you can amortize up to 30 years and in some cases with some of our lending partners, 35 years. Question: Why would you want a longer amortization? Well qualifying is based upon the payment. So it is easier to qualify with a longer amortization as a longer time frame means a lower payment. For example, you could qualify at 30 years amortization, but elect to pay bi-weekly accelerated based upon a 25 year amortization (an effective amortization of 22 years). The benefit of this strategy is that you can go back to the original amortization, less time elapsed, should you ever need to.
Let’s look at an example:
Mortgage of $300,000. Payment of $1,200/month based on a 30 year amortization. However, you elect to pay bi-weekly accelerated based on a 25 year amortization (effectively an amortization of 22 years – amortization is a function of payment). So bi-weekly is $680. However, 10 years into the mortgage you suffer a set back and are temporarily out of work. Only your spouse continues to work. You can approach the lender to “re-amortize” your mortgage, meaning 30 years less time elapsed, so effectively 20 years. However, in the 10 years that have elapsed, you have been making accelerated payments so your mortgage balance is lower than it would have been otherwise. The result is that your re-amortized payment is $1,000/month! Effectively built-in payment reduction insurance at no cost! Note: you could also use this strategy if rates were to rise substantially and you want to lower your payment!
Another reason to opt for longer amortization: Rentals, longer amortization means better cash flow! With a rental property, cash flow is King! If it pays for itself every month and the interest is tax deductible, who cares how long it takes to repay the mortgage? Every month it is building equity and eventually you will have enough equity you can refinance it to get a down payment to buy the next property and build up your rental property portfolio!
As always, get independent professional advice on which strategy and options are right for you. Your local independent Dominion Lending Centres Mortgage Broker can help.