20 Mar

Understanding Amortization


Posted by: Sarah Makhomet

When you’re applying for a mortgage, there is sometimes confusion with respect to the amortization.  Putting it simply, the amortization is the number of years it will take you pay off your mortgage.  This is not to be confused with the term of the mortgage.  As with most things, there are both advantages and disadvantage to the length of the amortization – A longer amortization will keep the payments lower, and with this more affordable.  A shorter amortization will pay the loan off quicker and could save tens of thousands of dollars in interest.

Based on current rates of around 3% and a $400K mortgage, a 25 year amortization would cost about $1892 per month and total interest over the 25 years of about $168K.  The same mortgage based on 20 years would cost about $2215 per month & $132K in interest.  The 20 year AM would save about 36-thousand dollars in interest over the life of the mortgage.

Over the past few years, there have been some significant changes brought about by regulators with respect to maximum amortization periods.  Currently, the maximum amortization for any insured mortgage (less than 20% down) is 25 years.  In 2012, that was brought down from 30 year, and 35 a year earlier.  If we go back a few years prior to this, we had 40 year amortizations. 

Keeping the same numbers ($400K mortgage & 3% rate), with a 25-year amortization, would need about $80K of household income to afford this mortgage.  For same mortgage with a 30-year amortization would require only about $72K of household income.

If you have the 20% down payment, there are still options to get a 30 year amortization.

The question next becomes, does a longer or shorter amortization period make more sense for you.  Before answering this, you need to fist look at both your budget and your goals.  Another consideration is what will happen when the mortgage comes due for renewal (from the current term), as rates may be significantly higher than the current low rates.

I’ll run through an example with the chart below:

Initial Mortgage

Initial Rate

Initial Amortization


  Balance at    5 years

Remaining Amortizaion

  Renewal     Rate

  New     Payment



25 years



20 years





20 years



15 years




Looking at this chart, if they were comfortable with a payment of about $2,200 per month, then taking the 20-year amortization may make sense.  In 5 years however, if you started with the 20-year amortization and rates are back in the 5% range, your payments would increase to a little over $2,500 per month, which may make your mortgage a little too expensive.  Taking the 25 year amortization today however, would keep your payments within your comfort level in 5 years.

Of course, it’s difficult to predict where rates will be in 5 years.  My advice in most circumstances is to take the longest amortization possible, and select a mortgage with good pre-payment options.  This keeps your required payment lower, with the option to pay more.  Any additional payment will go entirely toward principle which will reduce the overall amortization & borrowing costs.  This gives a few more options to keep payments within your comfort range should rates rise in the future, and also gives more flexibility should circumstance change (such as illness or job loss) and you’re not able to maintain the higher payment.

When your applying for a mortgage, speak with your mortgage broker to make sure you’re getting the  mortgage that best suits your needs.

14 Mar

Your down Payment


Posted by: Sarah Makhomet

The next few posts will be geared towards first time home buyers, today talking about down payment the Home Buyers’ Plan & mortgage default insurance (CMHC).

The minimum Down Payment required for the purchase of a house is 5%, though the minimum may be higher based the purchasers’ circumstances.  This can come from an individuals’ savings, investments, sale of another property, gifted (from a close family member) or in certain circumstances can be borrowed.  In most circumstances, if the down payment is pulled out of an individuals’ RRSP, this amount would be treated as taxable income, however if the they qualify as a first time home buyer, this can be taken tax free.

(First time) Home Buyers’ Plan – this is where the individual is taking money from their RRSP to use for the down payment or closing costs for the purchase of a home.  A few criteria must be met to qualify:

1 – Must qualify as a first time home buyer

2 – Money being used must be in the RRSP account for minimum of 91 days.

This money can be removed without being treated as taxable income.  It then needs to be paid back to the RRSP account in equal installments over 15 years, beginning 2 years after the home was purchased.  If this is not paid back in one particular year, the money for that year will be treated as taxable income. (as an example, if $15,000 is taken out in 2013 under this program, beginning in 2015, $1,000 must be repaid to the RRSP account.  If in 2017, the $1,000 is not repaid, then this amount will be treated as taxable income for this year).

The limit per home buyer is $25,000, so if a couple is buying a home and both are first time buyers, each can remove up to $25,000, so a total of $50,000.  If one person is a first time home buyer and the other is not, the first time home buyer can still use the program.

Mortgage default insurance – Commonly known as CMHC, is the insurance premium which is added to the mortgage should the buyer not have a minimum of 20% down payment (please note, there are circumstance where more than 20% may be required).  CMHC is one of the insurers, though they are not the only ones (Genworth & Canada Guarantee are the other two).  The premium is a percentage of the loan, and the percent decreases as the down payment increase.  This is added to the mortgage & amortized over the life of the mortgage.

These premiums are transferable, so if you are selling a house with an insured mortgage, and subsequently purchasing a new one (where the new mortgage will also be insured), your mortgage broker can apply to have the default insurance moved from one home to the next.  If the mortgage is increasing in value, there will be some costs, however there could be thousands of dollars in savings compared to paying the full premium.