With a mortgage, there are many options for you depending on your financial situation. Both variable and five-year mortgages are now available for less than 3 per cent, but those low rates won’t last forever.
Finance Minister, Jim Flaherty, decision last year to tighten the rules for mortgage insurance by reducing the maximum amortization from 30 to 25 years was the right one for Canadians to reduce household debt.
Some critics argued that this measure brought about the slowdown of the real estate markets due to the hike in minimum monthly payments for an insured mortgage. Many Canadians who would have bought homes could no longer qualify under this new rule.
However, let’s look at the numbers to see how this would help all the Canadians that are planning to take advantage of today’s low rates by buying a home or renewing a mortgage:
The average price of a home sold in Calgary in the month of February 2013 was $457,111. Assuming the average downpayment for a home would be close to 20 per cent, that would mean a $365,000 mortgage.
At a variable-rate mortgage of 3 per cent interest with 25 year amortization, your monthly payments would be $1,727.35 with a total of $518,203 paid including $153,203 of interest over 25 years (or 300 payments). However, if we switch to a 20 year amortization period, our monthly payments would of course increase to $2,020.89, but our total overall payments now total $485,013 with only $120,013 of interest payments. That’s a savings of over $33,000 in interest costs!
Do your own calculations using my Mortgage Calculator and you will see how much money you can save just by choosing a lesser amortization period. Even if you have to renew the mortgage later on, you will have a smaller balance to deal with. As we’ve seen, a lot can happen with interest rates in that time. For example, within the past decade, the prime rate (which drives variable-rate mortgages) rose by as much as 1.75 per cent in less than one year and term mortgage rates have varied even more.
So if you are looking for a new mortgage or renewing this year, choose the lowest amortization period you can afford and save your money!