An amortization period refers to the amount of time that is required in order to pay off your mortgage principal and interest expenses in full. You may have encountered different types of amortization schedules, including extended amortization, without fully understanding the meaning. Luckily, Clover Mortgage is here to help. In this guide, we will cover the different types of amortization, and how to know if extended amortization is right for you.
In Canada, the average length of an amortization period is 25 years, although amortization periods can also fall within a shorter range and a longer rang. Up until 2011, it was possible to have an amortization period of up to 35 years for a high-ratio insured mortgage. Unfortunately, that is no longer the case. If you have an insured mortgage (that is, a mortgage that is covered by mortgage default insurance), the maximum amortization period you are eligible for is 25 years.
However, there are some circumstances in which you may still be eligible for an amortization period of up to 30 years, and with some lenders even 40 years. This type of amortization period is commonly referred to as an extended amortization. Given that insured mortgages are not eligible for extended amortization, the only way to qualify for a longer amortization period is by making a down payment of at least 20%.
Before deciding on an amortization schedule, it is important to understand the ways in which different amortization periods can impact the overall cost of your mortgage.
One important consideration is the balance you must strike between monthly payment costs and total interest cost. A longer amortization period allows you to spread your principal mortgage payments across more payments, thereby reducing the amount you must pay every month. However, a longer amortization also means you will incur interest on more payments for a longer period of time, leading to a higher total interest cost across the lifetime of your loan.
Typically, shorter amortization periods will result in higher monthly payments but lower overall interest costs, whereas longer amortization periods will result in lower monthly payments but higher overall interest costs.
It is important to choose your amortization period carefully when selecting a mortgage, as it can have a significant impact on the overall cost of your mortgage and your financial situation. Before making a decision, you may want to consider the pros and cons of choosing an extended amortization.
Deciding to opt for an extended amortization period can provide you with a number of different advantages. Here are a few of the potential benefits you may incur:
Of course, extended amortization periods are not for everyone. Here are some potential drawbacks of an extended period that you may want to consider:
Before deciding to extend your amortization, it is important to 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:
Once you have met the criteria, you can begin thinking about whether or not extended amortization is the right choice for you. You may want to consider an extended amortization period if you are having trouble making your monthly payments or if you are looking to lower your monthly expenses to free up cash for alternate uses.
Extending your amortization period is one way to help manage your debt. However, it is important to remember that there are also other methods you can employ to achieve the same results. For instance, if you are having trouble making your mortgage payments because your monthly credit card bill has risen too high, you can consider taking out a home equity line of credit (HELOC) to consolidate your debts under a lower interest rate.
Another thing to consider is that not every lender is interested in providing extended amortization, so your mortgage broker will shop around on your behalf with different lenders before making a a recommendation to you. Our Clover Mortgage team can cross-reference our vast network of 50+ lenders to find the perfect match for you. We will help you decide if extending your current amortization period is right for you. Reach out to our Contact Clover Mortgage today to book your free consultation.