Extended Amortization Explained
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.
What Are the Different Types of Amortization?
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%.
How Does Your Amortization Period Affect Your Mortgage
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.
Pros and Cons of Extended Amortization
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.
Pros of Choosing an Extended Amortization Period
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:
- Lower Monthly Payments: When you are subject to an extended amortization period, the principal amount is spread out across a greater number of payments. This results in each monthly payment being lower than it would have been with a shorter-term mortgage. This can be a helpful benefit for homebuyers who already face high monthly expenses.
- Increased Flexibility: By extending your amortization period, you may have greater opportunity to adjust or reschedule your payments throughout the lifetime of your loan. This can help you avoid unnecessary penalties such as pre-payment or late payment fees.
- Convertible Options: If you are not sure whether you are ready to commit to an extended amortization period, you may want to consider opting for a convertible amortization period instead. This type of amortization schedule, negotiated between you and your lender, will allow you to begin with a shorter-term mortgage that can then be converted to an extended period mortgage if needed— without needing to refinance or renegotiate your mortgage.
Cons of Choosing an Extended Amortization Period
Of course, extended amortization periods are not for everyone. Here are some potential drawbacks of an extended period that you may want to consider:
- Higher Interest Cost: Due to the larger number of payments you are making over the lifetime of your loan, you will also incur a greater total interest cost. Fortunately, some convertible amortization periods allow you to adjust your interest rate upon converting to an extended amortization period, in order to not increase your overall interest cost.
- Longer Repayment Period : The shorter your amortization period is, the larger your monthly payments will be. As such, a shorter amortization often allows you to build equity in your home more quickly than in an extended amortization mortgage.
When Is Extending Your Amortization a Good Idea?
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:
- You have made a down payment of at least 20% of the home’s value
- Your loan-to-value ratio is no greater than 80%
- You are refinancing your home, and are looking to change your terms
- You need a lower monthly payment in order to qualify for the mortgage
- You need the extra cashflow and would prefer paying less each month
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.
Can Extending Your Amortization Help You Better Manage Debt?
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.
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