Choosing the length of your amortization period, which means the number of years you will need to pay off your mortgage, is an important decision for Vancouver home buyers that can affect how much interest you pay over the life of your mortgage.
Historically, the standard amortization period has been 25 years. However, shorter (10 or 15years) and longer (up to 40 years) time frames are also available. A shorter amortization saves you money as you will pay less in interest costs over the life of your mortgage. Your regular mortgage payment amount would be higher than if you had selected a longer amortization, as more of your payment goes towards paying down your principal balance. However, the benefits are that you build the equity in your home faster and are mortgage free sooner.
A longer amortization provides you lower monthly payments and because of this it is appealing to many people. However, it does mean that more interest will be paid over the life of the mortgage and you will build the equity in your home at a slower pace.
The chart below shows the impact of various amortization periods on the monthly mortgage payment and total interest costs (over the full amortization). It is important to be aware that the total interest costs increase significantly if the amortization period exceeds 25 years.
Example: Extended Amortization – 5 Year Fixed Rate Closed Mortgage
Details 25 Year 40 Year
Mortgage Principal $150,000.00 $150,000.00
Default Insurance Premium @ 90% LTV $3,000.00 $3,900.00
Total Mortgage Principal $153,000.00 $153,900.00
Monthly Mortgage Payment
(P & I) (5 yr Term @ 6.00%) $978.91 $838.90
Monthly payment reduction from 25 Year Amortization $140.01
Interests Costs for Full Amortization $140,668.98 $248,753.29
Additional Interest Costs for the Full Amortization over the 25 Year Amortization $108,084.31
You have the flexibility to shorten your amortization period.
Regardless of which amortization period you select when you originally applied for your mortgage, it does not mean you have to stay with it throughout the life of your mortgage. It makes good financial sense to re-evaluate your amortization every time you renew your mortgage.
RBC offers a breadth of mortgage features designed to help you pay down your mortgage and build your home equity faster. Please contact me and I can help you determine the right amortization period and mortgage option for you.
RBC’s 5 year closed 5.7%. Variable 4.4%. Prime 4.75%
The above information is courtesy of Tony Rossander Mortgage Specialist RBC Royal Bank Tel:604.612.6252 Fax: 604.526.3344 tony.rossander@rbc.com. Contact him for further info.
Have you opted for a 40 year amortization? What was your thought process in reaching that decision? Do you expect to shorten the amortization at some point? Have a mortgage question you’d like answered?
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