Mortgage Amortization period #home #loan #interest #rates

#amortization mortgage


Mortgage Term vs. Amortization

The mortgage payments under scenario B are smaller each month, but the home owner will make monthly payments for 5 additional years. The total interest saved by going with a shorter amortization period exceeds $100,000.

For the savvy investor, these savings should be compared to the opportunity cost of other investments. Using the example above, the monthly savings of $142 under scenario B, could be invested elsewhere, and, depending on the rate of return, could come out ahead after 35 years.

Prepayment privileges set out by your lender will determine whether you can shorten your amortization period, by either increasing your regular monthly payments and/or putting lump sum payments towards the principal, without penalty. However, beyond these privileges, you will often incur costly penalties for making additional payments. According to the Canadian Association of Mortgage Professionals, 24% of Canadians took advantage of prepayment options in 2009.

Popularity of mortgage term and amortization periods

A 5-year mortgage term, at 66% of all mortgages, is by far the most common duration. A further breakdown shows that an additional 8% of mortgages have terms exceeding five years, while 26% of mortgages have shorter terms, including 6% with one year or less and 20% with terms from one year to less than four years.

Type of purchase 2 .

The most common mortgage amortization period, on the other hand, is 25 years. However, 42% of new mortgages had amortization periods exceeding 25 years. This is an interesting observation considering amortization periods were only extended to 35 years in 2006.1 As of July 9th 2012, the maximum amortization period on all CMHC insured homes will be reduced from 30 to 25 years.

References and Notes

  1. Source: Canadian Association of Accredited Mortgage Professionals (CAAMP) Fall 2010 Consumer Report
  2. Source: Canadian Association of Accredited Mortgage Professionals (CAAMP) Fall 2010 Consumer Report

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