30, 35 And Even 40 year Amortization Periods Now Available!

It's true! In recent months both CMHC and Genworth Financial (Mortgage Insurance companies for high ratio mortgages) have launched mortgage insurance now available for longer amortization periods.

So what does this mean to the average consumer? Well, first let's review exactly what an Amortization period is. By definition, amortization is the term used to describe the total period of time over which the entire mortgage is to be paid assuming regular periodic payments.

In other words, it is simply the process of gradually paying down the principle balance of your loan. Each payment toward the principle reduces your total loan by that amount. The shorter the amortization, the faster you pay off your loan.

Many people will effectively reduce their amortization periods by increasing their payment amounts. This, in turn, increases the amount of principle they pay each month. Accelerated payment frequencies ( For example Bi-weekly accelerated vs. Monthly payments) and lump sum payments (paying an extra amount from time to time in one lump sum payment) will also reduce the amortization period.

So if the goal is to reduce your mortgage and pay it off as quickly as possible, why would anyone want to set up their mortgage loan on a longer amortization period? There are actually several reasons.

First, consider the idea of home ownership vs. renting. With today's booming economy and the seemingly endless increase in home prices, many Canadian consumers have been priced out of the market, making home ownership a distant dream. A longer amortization period can often be the solution. The longer the amortization, the smaller the required monthly payment and thus the lower the income required to qualify. In some cases these new longer amortizations periods will mean the difference between owning a home or not.

So, a longer amortization period means a lower monthly payment. This can be a huge advantage. By getting your mortgage set up now on a longer amortization you set your monthly minimum required payments fairly low. This can be a great asset when times are tough and you can only afford to make the minimum required payment. When things are going well, however, you have the option to make a higher payment and in doing so will effectively lower your amortization period.

Suppose you wanted to do some home renovations, but did not want to increase your current payments. A longer amortization could do just that. You could refinance your property, remove the money you need to renovate your home or develop your basement and by increasing your amortization period, your payment could remain the same or even decrease! Meanwhile, your house is increasing in value due to your recent improvements.

Source: Unisource Mortgage Canada Newsletters Archive