Feeling the renewal squeeze? Let’s talk amortization
If your mortgage is up for renewal soon, you’re in good company. One strategy Canadians are leaning on: extending their amortization period.
Amortization refers to the period of time in years that a borrower will take to repay the loan in full. When borrower enters his initial mortgage, the amortization is generally set for 25 years but it can be extended or reduced based on some criteria. The maximum amortization period is 40 years and the smallest is essentially zero when a mortgage is fully repaid.
That’s a fancy way of saying stretching your mortgage out over more years to make monthly payments smaller.
During the term of the mortgage multiples factors influences the amortization period:
- The payment frequency has the biggest impact on the amortization. The more frequent the borrower makes a payment, the shorter the amortization will become because the principal will be repaid faster.
- Making additional payments over the pre-scheduled mortgage payment where the full amount goes against the principal will also significantly reduce the amortization period.
- Longer amortization period will result in lower payment over the duration of the mortgage but the consequence is that more interest will be paid. This option is good for people with limited income and tight budget or the borrower prefers to keep funds as safety.
It’s important to point out that extending the amortization over 25 years could result in a small rate premium by the lender to compensate for additional risk. On the other hand, a shorter amortization period will result in higher payment and be mortgage free sooner, this can leave the borrower without excess funds should an emergency occurs. As mentioned above the payment frequency will have the most significant impact on the amortization. The higher the payment frequency, the faster the principal will be repaid and shorter the amortization will be.
Here’s the trade-off in plain terms:
Pros and Cons of Extending Your Amortization
Pro
Lower monthly payments = more breathing room in your budget
Con
You’ll pay more interest over time (and yes, that adds up)
Here’s a quick comparison for a $900,000 mortgage at a 3.84% fixed rate:
| Amortization Period | Monthly Payment | Total Interest Paid |
|---|---|---|
| 25 years | $4,656 | $496,681 |
| 30 years | $4,221 | $619,490 |
Difference:
- Monthly savings by extending to 30 years: ≈ $435/month
- Additional interest cost over the life of the mortgage: ≈ $122,809
But if renewal rates are higher than your current rate, extending your amortization might be the life raft that keeps your finances afloat instead of watching your payments climb faster than grocery prices.
Related Read: Use our mortgage renewal calculator to crunch some numbers yourself
Amortization Example
For example:
Property value $1,000,000
Downpayment: $200,000
Mortgage amount: $800,000
Rate: 4.25%
| Payment Frequency | Amount | Amortization Period | Total Interest Cost |
|---|---|---|---|
| Monthly (12) | $4,317.28 | 25 years | $495,184.39 |
| Semi-monthly (24) | $2,157.57 | 24 years, 11 months | $494,544.12 |
| Bi-weekly (26) | $1,991.53 | 24 years, 11 months | $494,494.85 |
| Accelerated bi-weekly (26) | $2,158.64 | 21 years, 10 months | $422,624.64 |
| Accelerated weekly (52) | $1,079.32 | 21 years, 10 months | $421,813.93 |
Monthly:
This is the most common payment schedule. You’ll make 12 payments a year, once a month, resulting in the most interest paid and taking the longest amount of time
of all the options.
Semi-monthly:
With a semi-monthly payment plan, you’ll make payments twice a month, resulting in 24 payments a year. This schedule will reduce your amortization period by about one month.
Bi-weekly:
Bi-weekly payments are made once every two weeks, resulting in 26 payments a year. Similar to a semi-monthly payment schedule, your amortization is reduced by a month.
Accelerated bi-weekly:
With an accelerated bi-weekly payment schedule, you take your monthly payment, divide it by two, and make that payment every two weeks. This results in an extra monthly payment each year compared to a regular bi-weekly payment schedule. This helps to reduce the principal balance more quickly.
Accelerated weekly:
An accelerated weekly payment schedule involves dividing your monthly mortgage payment by four and making that payment every week, resulting in 52 payments per year. This method effectively adds an extra monthly payment annually, reducing the principal balance more quickly.
Stress test requirement to extend amortization period
It’s important to note that if you choose to extend your amortization period while switching lenders, you may be required to go through a stress test again. As of November 21, 2024, borrowers who switch to a new lender will be exempt from the stress test only if their mortgage amount and amortization period remain the same. However, if you extend your amortization period, you will need to undergo the stress test, which could affect your ability to qualify for the new mortgage or impact the rate you receive.
P.S. There’s a difference between choosing to extend your amortization and hitting your trigger rate (when your payments only cover interest). If you’re unsure where you stand, we can help.
Reminder: Don’t just auto-renew.
Your current lender isn’t always offering the best deal (they already have your business, after all). Working with a mortgage broker through Easy House Loan gives you access to multiple lenders and often better rates potentially saving you thousands over your next term.