Are you about to buy a new property and want to find the best scenario for setting your mortgage repayment period?
Be aware that this is a decision worth considering, as it will have a huge impact on the total amount of interest you will pay over the life of your mortgage.
Here are the advantages and disadvantages that will allow you to choose between the traditional 25 years and the 30 years.
How it works ?
You should know that if you put less than 20% of the value of the property as a down payment, you will be obliged to take out a mortgage insured either by the Canada Mortgage and Housing Corporation (CMHC) or by Sagen, simply to guarantee your payments to the bank.
If your financial situation allows it and you are able to put more than 20% down payment, you will not have to have your mortgage insured. You will therefore have the choice, at certain financial institutions, to repay over 30 years rather than over 25.
30-year mortgage
This period still attracts a lot of interest from many buyers because the monthly payments are lower and it allows you to stay on a less tight budget. However, the amount of interest paid over the life of the mortgage will be more, and you won’t pay off your house as quickly.
25-year mortgage
With the current state of the real estate market, where mortgage rates are at an all-time low, paying off your mortgage faster will save you interest charges, but it is not necessarily the best strategy for everyone.
If you don’t have an emergency fund, this might be a good time to create one. This will help you deal with the unexpected.
You could also invest in an RRSP or TFSA, for example, to take advantage of these plans, but the return should be much higher than the interest charges on your mortgage.
Unfortunately, trying to avoid spending the money accumulated in your emergency fund or TFSA can be a daunting task. If this is your case, I suggest that you opt for the shortest possible amortization and thus pay off your mortgage more quickly.
To help you make the best decision: above is an example for a 15, 25 and 30 year mortgage.
Bottom Line: The longer the repayment period, the lower your monthly payments will be. However, the total of your interest charges paid will be greater with a shorter repayment period. You choose !
- Ghislain Larochelle is a professional registered with the Order of Engineers of Quebec and the OACIQ.
A comparative example
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Advice
- You will always have the opportunity to reduce your initial amortization period when refinancing. You don’t have to maintain it for the duration of your mortgage.
- To further reduce interest charges, you can increase the amount of your regular payments or make a lump sum payment.
- If you renew your mortgage and the interest rate is lower, you can keep your payments the same and pay off your mortgage faster.
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