In simple terms, amortization is the act of paying off a debt in equal installments over time. A portion of each payment you make goes toward the loan principal and a portion goes toward the interest. When it comes to mortgage amortization, the amount you pay toward the principal starts out small and grows gradually over time. If you have a fixed-rate loan, the amount paid toward interest declines slowly over time. Learn more about how mortgage amortization works, how to understand the schedule and how to calculate your monthly installments toward the principal and loan.
Can You Extend Mortgage Amortization?
While you can extend your mortgage amortization period, doing so becomes an extra risk factor as it shows your lender that you need more time and lower payments in order to commit to paying off your loan. It’s also important to note that the process of extending your mortgage amortization period is treated as a new application so you’ll have to qualify for the mortgage all over again.
If mortgage insurance is required, the longest amortization period allowed in Canada is 25 years. Without insurance, a 30-year amortization is possible.
How Is A Mortgage Amortized?
In Canada, you negotiate your interest rate in terms over the course of time, instead of up front for the entire amortization period. In terms of periods of time, it’s typically anywhere from 6 months – 5 years, where you borrow money from a financial institution at an agreed upon interest rate. Once each term ends, you have the ability to renew for another term, pay off your mortgage in full, or move to another financial institution. This process will continue in terms until your mortgage is fully paid off.
Your mortgage amortization is also directly impacted by your monthly payments, as a portion of each one goes toward the principal and a portion toward interest. Although your monthly payment will remain the same each month, the amount going toward both the principal and interest will change with each payment because the more you pay on your principal, the less interest you’re charged. In short, the more money you put toward your principal, the shorter your amortization period will be.
How To Use Edison Financial’s Mortgage Amortization Calculator
Take the guesswork out of your mortgage application process by using our Mortgage Amortization Calculator tool. Simply plug in a mortgage amount, mortgage term and interest rate to figure out your estimated monthly mortgage payment and interest paid over time.
It’s important to remember that all calculators are provided for illustrative purposes only; they do not take your personal circumstances into consideration and the results are not guaranteed to be accurate. Always speak directly to a professional before you make any important decisions regarding your finances.
Should I Make Additional Mortgage Payments?
If you’re looking to reduce your overall amortization period, there are a few things you can do, including making additional mortgage payments. When you pay your mortgage once each month, that equates to 12 payments over the course of a year. If your financial institution offers the ability to pay bi-weekly, you may want to consider taking them up on the opportunity as it will equate to one additional payment each year. This doesn’t seem like much, but in reality, it will help shorten your amortization period and pay off your mortgage faster.
– If you’ve yet to make an offer on a home, you can also consider making a larger down payment, as even a few thousand dollars extra upfront can save you thousands of dollars in interest over time.
– If you’re approaching a renewal of your mortgage terms soon, consider hunting down a lower rate and then keeping your payments the same instead of choosing to shrink them in relation to the new rate. This means you’ll pay more toward your principal and you’ll be mortgage-free sooner.
– Some mortgages will provide the option to increase your payment amounts once a year. If you can afford it, this is ideal because those extra funds will go directly toward your principal. The increase doesn’t even need to be substantial. Consider a change as small as rounding up to an even number (e.g., moving from $1,272 to $1,300 per month).
– Pre-payment options are available with open mortgages. Most Canadians choose a closed mortgage so be sure to do your homework before approaching this option as it may not be possible based on your terms. You also may have an option to make a lump sum payment at the end of your current mortgage term, so asking the proper questions about pre-payment options in advance is always wise.
Whether you already own a home and are actively paying a mortgage, or you’re just starting to hunt for your first ever home, it’s so important to understand mortgage amortization and how it impacts your overall investment and monthly payment schedule. Contact the team at Edison Financial to learn more about your mortgage options and how to assess your financing options strategically.