The amount of time taken to completely pay off you mortgage is known as the “amortization period.” Your down payment will determine the maximum amortization period you’re given. If your down payment is lower than 20 percent of the price of your home, the maximum amortization period is 25 years.
If your down payment is less than 20 percent this is regarded as a high-ratio mortgage and it must be insured. This type of policy is called mortgage default insurance. It is also popularly referred to as CMHC insurance. Your premium safeguards the institution you borrow from in the event of any default. Canada Mortgage and Housing Corporation and of course, your lender, want to be sure you will manage your money well enough to pay your loan within the agreed period of 25 years, especially considering the additional risk a high-ratio mortgage carries.
You can get a conventional mortgage once you make a down payment of 20 percent of the purchase price. In this case, you would not need CMHC insurance. It also means you can spread out your payments over a longer amortization period – most lenders will give you a maximum of 30 years. Since you will pay the mortgage off over a longer period of time, you will pay less each month, fortnight, or week. The disadvantage of the long amortization period is that you will pay more interest over the life of the mortgage.
Ways to Shorten Your Amortization Period
If you’re in the financial position, you should pay off your loan before the 25-year period is up, since you can get prepayment privileges from most lenders. These privileges let you do one of two things: either pay a lump sum towards the loan or make higher monthly payments.
Data from the Canadian Association of Accredited Mortgage Professionals shows that 35 percent of Canadians made use of prepayment privileges offered on their mortgage loans in 2012. Speak to your lender and find out precisely what prepayment privileges your loan carries. Your lender can impose expensive penalties if you go beyond the privileges they set out.
Are there advantages to a long amortization period?
Some skilled investors may opt a longer amortization period, and invest the difference in payments for a higher return. This approach is now more popular because of lower interest rates banks are currently offering on mortgages.