Chad Moore Calgary Mortgage Broker

Amortization is the amount of time it would take you to repay your Mortgage, with the details of your Mortgage unchanged, to a balance of zero.  Put another way, it’s how long it will take you to become Mortgage free.

In Canada, you also select the term for your Mortgage.  This may be a 3 year term or 5 year term, etc.  Each term has a corresponding interest rate.  Usually, the longer the term, the higher the interest rate.  At the end of your term you renegotiate the next term of your Mortgage.

If you completed five 5 year terms and began with an initial amortization of 25 years, you would be Mortgage free in 25 years.

Amortization is a fancy way of saying the “long-term” of your Mortgage.

But the truth is, you are likely going to change the terms of your original balance BEFORE your initial term up.   A change, for any number of reasons (moving, removing someone from the title of your home, lowering your interest rate, equity take out, etc) is typically to improve your situation.

When there is a change to anything material about your existing Mortgage contract, this is considered a refinance.   When people refinance, they are typically changing their initial amortization period.

Now that you understand what a Mortgage amortization is; another question to ask is HOW can you reduce your amortization?

One simple suggestion is honor your initial amortization period.  If you make any changes to your Mortgage, maintain your amortization to the years you have remaining.  I also understand certain scenarios that call for longer amortization periods to  lower payments for qualification purposes.

Another simple suggestion is to increase your monthly payment OR make lump sum Mortgage payments.  Each lender has some version of pre-payment privileges their clients may or may not take advantage of.

I am an advocate of simple monthly payment increases.  Every dollar that you increase your payment by goes directly towards the principal balance of your Mortgage.  When you do this, your Mortgage balance, at your future renewal date, will be much lower.  The less money you borrow, the lower your repayments are, the less interest you pay over the life of your Mortgage.

Sounds simple enough?  And I think this is a great idea, but I wonder how many people actually exercise this pre-payment option?

Thank you for reading!

Chad Moore