Should you consider taking a longer amortization?

Should you chose a longer amortization plan? It depends on your situation.  Here are the pros and cons of taking a longer amortization:

Pros

1) You could purchase a more expensive home.   For example, a couple earning $80,000 would normally be allowed to purchase a home worth $365,000 with a 25 year amortization plan.  This same couple could qualify to purchase a home worth $430,000 on a 35 year amortization plan.

2) You could lower your payments by spreading your payments over a longer period.  For example, payments on a $300,000 mortgage is $1,660 per month (@4.5% interest) using a 25 year amortization.  With a 35 year amortization, your payments drop to $1,412 per month.  The lower payments can make it much easier on your budget or allows you to invest in RRSPs.

3) When you are able to afford the higher payments, you can always shorten he amortization by increasing your monthly payments or making extra payments

REMEMBER: Amortization refers to the amount you pay per month.  By taking a 35 year amortization, you're choosing to reduce your monthly payments so that you pay the mortgage off in 35 years. The amortization is not set in stone  So, if your income increases and you are able to increase your payments (as most mortgages allow you to do), the amortization automatically shortens.    

Cons

1) You don't get to pay down your mortgage quickly.  Having a mortgage for a longer period naturally means that you'll pay more interest.  Of course, one alternative to paying your loan quicker is to invest the money (possibly in an RRSP) which in the long run can significantly boost your net worth.

High Ratio (when you have less than 20% of the purchase price for a down payment)

Longer amortizations were not generally available until the Summer of 2006.  Prior to that, one would have to go to a specialty lender to obtain an amortization longer than 25 years.

In a major policy announcement,  the Canadian Housing and Mortgage Corporation (CMHC) and Genworth Financial announced that they will accept applications with amortizations up to 35 years.   The mortgage insurance fee is increased by 0.2% for every 5 years that is added to the amortization.  If your mortgage does not need to be insured (i.e., you have at least 20% equity), you can still obtain 35 year amortizations through a few select lenders.

Interest-Only Mortgage

If you still think the payments on your mortgage is too high, please visit our Interest-Only Mortgage page to learn more about this option.  Unfortunately, with the liquidity crunch in late 2008, many lenders have suspended their offering of interest-only mortgages.  The only way to obtain this is via a line of credit mortgage.

"My job is done when you know your options"