After months of searching you've finally bought your home and have been approved for a five-year fixed rate mortgage at 2.85 % - great !. Now, it's time to consider your next big financial decision - how long should your mortgage amortization period be?
While the most common amortization is 25 years , some mortgages offer the home buyer the option of to pay more than the minimum monthly payment, thus shortening the length of the mortgage to 20 or to even 15 years. If you can handle the higher payments, a shorter amortization period to begin with will see you owning your home sooner and saving thousands in interest payments and be debt free sooner.
Until last year homeowners could choose a maximum amortization of 30 years (now it's 25 years) for homeowners making less that a 20 % down payment (you can still obtain a 30 year amortization if you have a conventional mortgage) What does this mean for the average homeowner - it means you'll have a higher mortgage payment.
Five years ago you'd most likely be paying over 5 % for a five year fixed rate mortgage, today you can get a similar mortage for less than 3 % . Mortgage debt is one of the cheapest forms of debt. If you have high interest debt like credit card debt, it makes sense to concentrate on paying off that debt first.
A longer amortization period is a great form of risk management. If you get sick or lose your job, your mortgage payments won't be as high with a 25 year amortization than if you had gone with a 15 or 20 year - you can often increase your mortgage payments or make lump sum payments by 15 or 20 percent. You can pay the same payments as if you had originally gone for a 20 year amortization period, bu with less risk, since you can always stop the prepayments if you have a financial emergency.
You'll only benefit from a longer amortization if you are financially disciplined and use the extra money towards prepayments or make contributions to your RRSP or TFSA. If you're afraid that you'll spend you money on the latest high tech gadgets or toys, a shorter mortgage amortization period makes sense. Mortgage rates may be low now but they won't remain this low forever.