*NOTE* Forty Year Amortizations are no longer available in Canada. The information below is maintained for historic purposes. Twenty-five year amortization periods or lower are standard as of mid-2012.
Did you know that you can get a Canadian mortgage that allows you to pay it back over forty years? It’s true! The forty-year mortgage allows people to significantly reduce their monthly payments to improve their cash flow or free up funds to invest. There are many reasons why someone might choose a forty-year amortization.
The Government of Canada announced this past summer that after October 15th, 2008, the longest amortization period allowed by law for an insured mortgage will be 35 years. All is not lost! First Foundation still has several lending partners that will continue to offer forty-year amortizations on most of their mortgage products as long as you have at least 20% equity in the home. That is, if you purchase a home with a minimum of 20% down, you can still obtain a 40 year amortization.
Apply for a Mortgage Now if you already know you want a Canadian mortgage amortized over forty years.
WHAT IS “AMORTIZATION”?
The amortization of a mortgage is the amount of time that that you should take to pay off your mortgage in full, making only the minimum monthly payments (that means not using any of your prepayment privileges). Therefore, if you have a 25 year amortization, it should take you 25 years to pay off your mortgage loan. If you have a 30 year amortization, it should take you 30 years, and so on.
IS THERE A REASON TO CHOOSE 40 YEAR AMORTIZATION?
The majority of homeowners don’t want to pay off their mortgage over 40 years. In fact, they want to pay off their mortgage as fast as humanly possible. That being said, there are some situations where a 40 year amortization can come in handy:
- You want to purchase a home, but if you were to choose a lower amortization period, your income wouldn’t support the larger mortgage payments that come with a shorter amortization.
- You want to free up your personal cash flow for some reason or another, and therefore want your mortgage payments to be as low as possible. When you’re able, you can put extra money towards your mortgage using your prepayment privileges.
- You have bought a property to be used as a rental, and therefore want to pay as little as possible towards the mortgage so that you have more monthly income, and also receive the maximum tax deductions possible for the interest.
You have credit card or other high-interest debt that you would like to pay off quickly, so you need your mortgage payments (at a lower interest rate) to be as low as possible to free up extra cash to pay off your debt.
DOES IT HAVE TO TAKE SO LONG?
Absolutely not! In fact, most people who start with a 40 year amortization period use other techniques to eventually pay it off much faster. The reality is that – with pre-payment privileges – you can pay almost any mortgage off in under five years…as long as you take full advantage of those privileges. Here are some great tips on paying your forty-year mortgage off much faster:
- Make bi-weekly accelerated or weekly accelerated payments
- Make lump sum payments towards the principal, using any extra cash you have on hand (such as your income tax refund, if you get one)
- Take advantage of your prepayment privileges, and increase your monthly payment if you’re able (say, you get a raise at work)
- Sell under-performing unregistered investments and apply the proceeds to the mortgage principal
Choose a mortgage term or product with a lower interest rate, such as a 3-year term instead of a 5-year term or an Adjustable Rate Mortgage (ARM)
I HAVE QUESTIONS…IS THERE SOMEONE I CAN CONTACT?
First Foundation is more than happy to answer any questions you have about 40 year amortizations, as well as any other mortgage-related questions. Please Contact Us if you have any specific questions, or you may also refer to our Frequently Asked Questions page for more information.