Interest Free Mortgages

Evaluating the new 30 year and 35 year amortization periods
 
Up until earlier this year, the maximum amortization period an individual could attain on a mortgage in Canada was 25 years.  However, with both housing prices and interest rates continuing to rise, Canadian Mortgage and Housing Corporation (CMHC) has recognized that there may be a need to keep affordability in check. 
 
With this in mind, CMHC increased the amortization period to 30 years in the beginning of March on a pilot basis. 
 
The project was a tremendous success and it helped many Canadians enter the housing marketplace. 
 
Consequently, CMHC has made the 30-year amortization offer an ongoing product.  Additionally, they are introducing a 35-year amortization period. 
 
By extending the amortization period, I believe CMHC is making a statement that they are committed to ensuring home ownership is accessible to as many Canadians as possible. 
 
But how does the amortization period effect mortgage payments? Let’s illustrate this with an example.
 
If a buyer required a $190,000 mortgage and selected a 25-year amortization, the monthly payments would be $1,215.  Monthly payments for a 30-year amortization would be $1,130, while monthly payments for a 35-year amortization would be $1,075.  That means the monthly savings range from $85 per month (on 30-year amortization) to $140 per month (on 35-year amortization).  As these figures show, monthly savings can be achieved — thereby making a home purchase more affordable — when the amortization duration is extended.
 
On the other hand, extended amortization periods mean increased interest charges. This is an obvious disadvantage of extending how long you take to pay back a mortgage. Total interest paid increases as the amortization period increases. Thus, someone who pays back their mortgage over 35 years will pay much more in interest relative to someone who pays their mortgage back in 25 years. 
 
However, borrowers who opt for a longer amortization period still have options available to partially negate these additional interest charges and thus reduce the affective amortization period.  For example, consumers can make bi-weekly payments on their mortgages, increase their monthly payments, or make an annual lump-sum payment towards their mortgages. 
 
Additionally, here are a couple of points to be aware of in regards to choosing your amortization period.  Having an extended amortization period means you will be charged an additional .25% premium on your CMHC fees.
 
As well, for qualification purposes, lenders still assess buyers with the standard 25-year amortization period.  The buyer can then opt for a 30-year or 35-year amortization period, once they are approved for the shorter period. 
 
In conclusion, it is imperative for buyers to understand that today there are a multitude of mortgage options available.  It is equally important to understand the structure of mortgages; this means knowing what component of the mortgage payment is allocated to interest, versus what is being paid toward the principal. It is this that will ultimately determine how long it will take to pay off the mortgage, and just how expensive financing will be!
 
With a 30-year or 35-year amortization, monthly payments are lowered, but total interest charges over the term of the loan are increased. It’s essential that you evaluate your individual needs and make the decision that best meets both your short and long term plans.