How Mortgage Amortization Extensions Could Help Affordability
With the increased costs of living and higher mortgage rates, many homeowners and buyers are looking for ways to reduce their financial burdens. Extended mortgage amortizations are a potential solution for providing some relief by increasing the amount of time to pay down the full amount of the mortgage. This strategy helps to lower monthly payments and provide financial flexibility, but it’s important to understand the benefits and costs before deciding.
Understanding Mortgage Amortizations and Extensions
The total time it will take to pay off the mortgage is considered the mortgage amortization period. Most Canadians are familiar with the typical 25- or 30-year mortgage amortization periods, however, some lenders may offer solutions for longer amortizations. As the mortgage gets paid down over the years, the amortization period at renewal tends to shorten, depending on the situation. By extending the repayment period, homeowners can significantly reduce their monthly payments on their mortgage, creating more flexibility in their monthly budgets. These extensions, however, do come with considerations.
As an example, a homeowner with a $400,000 mortgage at 5% interest would have a mortgage payment of approx. $2,326 on a 25-year amortization. If that amortization is extended to 30 years, their monthly payment would lower to $2,134, leaving them with an additional $192 per month. This amount could be used to cover other important expenses, like rising grocery costs, paying down high-interest debt or unexpected expenses.
The Long-Term Considerations
While a lower monthly payment may be a current necessity, the long-term interest costs will be higher over the lifetime of the mortgage. There may be the option to counteract this by lowering the amortization again in future if the homeowner is in a better position, but this is not always possible. Therefore, homeowners should be aware of the full cost of borrowing for any strategy involving an amortization extension. Additional strategies to help offset interest costs could include lump-sum payments and/or bi-weekly accelerated payments to help pay down principal balances faster.
Who Could Benefit from an Extended Amortization
Extending the amortization period is not just an option for current homeowners but may benefit others such as those looking to enter the real estate market as well as families wanting to upgrade their home or community. First-time homebuyers may be able to afford slightly larger properties or homes closer to the city, whereas families outgrowing their current home may be able to get into a larger home or a property with additional space.
How to Decide
Since every homeowner’s financial situation is unique, there is no one-size-fits-all strategy that works for everyone. Extending an amortization period may be the perfect solution for someone looking to lower their monthly mortgage payments to help meet other demands, but it is crucial to weigh costs and benefits very carefully. A mortgage broker is a great resource to utilize to better understand all the pros and cons of this strategy as well as other opportunities that may be available. With access to additional lenders and extensive industry knowledge, a mortgage broker can help find the perfect solution.
