For Canadian homeowners, mortgages are substantial financial commitments.
When circumstances change, re-amortizing the mortgage can be a useful strategy to modify repayment schedules for lower payments. Of course, there are pros and cons to extending your amortizations, which are important to understand.
Here are some of our key considerations when it comes to extending amortization.
1. Understanding Your Current Mortgage
Many lenders offer the ability to extend your mortgage amortization should you require it. If considering re-amortizing your mortgage you would want to first check with your current lender to confirm that you have the ability to extend your amortization, and if so, by how much.
2. Pros of Extending Amortization
Extending amortization allows you to lower your mortgage payment by stretching out the loan repayment over a longer period of time. For example, if you currently had a $300,000 mortgage at 5% amortized over 15 years, your payment would be about $2,365 per month. If you elected to extend your amortization to 25 years your payments would reduce to about $1,745 per month. This $620 per month savings could help in times when cashflow is tight.
3. Cons of Extending Amortization
While you would benefit from the reduced payment from a cashflow perspective, extending your loan over a longer period of time incurs more interest, so it’s important to understand the impact. In the example above, extending amortization from 15 to 25 years for a $300,000 mortgage at 5% would cost about $5,000 more over a 5-year period. If you were to compare a 15-year amortization to a 25-year amortization for the example above, you would pay about $100,000 more interest over 25-year amortization vs the 15-year.
4. Reducing Amortization
Just because you’ve extended your amortization doesn’t mean that you can’t reduce it. Many lenders allow for you to increase your payments, which would reduce amortization. In the example above, if you started with a $300,000 mortgage over a 25-year amortization at 5% and elected to increase your payments by 20%, your amortization would reduce to about 19 years, and you’d save about $2,300 in interest over a 5-year term.
Contact Your Lender
If you’re interested in knowing if you’re able to extend your amortization and the potential positive and negative impacts, reach out to your lender to discuss as each circumstance is unique. Book an appointment with a Vancity Mortgage Specialist. Our dedicated team is committed to supporting you, making sense of these changes, and guiding you towards a confident financial future.
Did you know that Vancity offers mortgage insurance? Our Group Mortgage Protection (GMP) can help you rest easy knowing you’re covered if the unexpected happens. Learn more about all our coverage options.