Which Mortgage Amortization Is Best For Me?

When answering the question which mortgage amortization is best for me, the first point we should address is what is an amortization period? And amortization period is the length of time that it will take to pay off a mortgage completely. This is assuming that the mortgage rate and payments remain consistent which they will likely not because the mortgage TERM is usually much less than the amortization period. For example, the term of your mortgage where the rate is guaranteed is usually a maximum of five years [although they can be longer but I don’t recommend it] but the amortization period may be something closer to 25 years or more.

So the term is the length of time that the rate will remain consistent but the amortization is the length of time that it will take to pay off the mortgage completely.

Now that that is settled, what amortization lengths are available to homeowners? Well, if your mortgage is insured, in other words, you are purchasing a home and putting less than 20% down, then you are forced to take a 25 year amortization as part of the stress test.

If you are renewing your mortgage or you are purchasing a home with 20% or more down payment, then you have the option to reduce your amortization to less than 25 years or more than 25 years. 

You can reduce your amortization to as little as five years depending on the lender, but please know that you need to qualify for those payments. In other words, the shorter the amortization, the last time it will take to pay off your mortgage, and the higher the payments will be. If the bank agrees to allow you to make those higher payments and pay it off very quickly, of course you need to prove that you can afford it. Why would you want to have a short amortization? To be mortgage free more quickly! However, we caution our clients on shortening the period too much, because once you agree to those “high” mortgage payments, you are “stuck” with them for the term of the mortgage. Many of our clients find it better to not exaggerate and reduce the amortization too much but rather agree to make slightly lower payments with a slightly longer amortization and if they choose to make larger payments or lump sum payments on the mortgage, they can utilize the pre-payment privileges on the mortgage. This gives our clients the flexibility to make the higher payments if they find themselves in a position to do so but not be locked into the higher payments.

Depending on the bank, our clients can extend the amortization as far as 40 years. why would somebody want to drag out their mortgage for that long? Well, one answer is that they are in no hurry to pay off their mortgage. Maybe they feel that their money would be better spent or invested elsewhere. another reason may be out of necessity. If our clients cannot afford the mortgage payments at 25 years or less, they may choose to extend the amortization to make the mortgage more affordable. Yes, it will take longer to pay off the mortgage, but it may also make homeownership possible.