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Thirty-five years is the maximum amortization period allowed in Canada. Yet, despite the registered amortization of any mortgage, the length will often fluctuate for each individual borrower. That's because some borrowers prepay their mortgage before the total amortization period has ended while others make the terrible mistake of resetting their amortization period each time they renew or refinance, which can keep them trapped in a lifetime of mortgage repayment.
Either way, not many Canadians know how much mortgage interest they will pay or that they have currently paid on their mortgage loan. This can create financial setbacks during the mortgaging process which will be discussed here.
A mortgage commitment or contract usually allows borrowers to prepay their mortgage in two different ways. The first way is through added extra payments to each scheduled mortgage payment and the second way is through lump-sum payments made each calendar year.
In Canada, although the mean amortization is quite lengthy, a mortgage is only allowed in terms, which cannot exceed 10 years. The most popular mortgage term is 5 years. In contrast, in the United States, a mortgage term is the same length as the amortization period which can simplify the math about how much total interest will be paid. This can help borrowers plan their prepayments more effectively and avoid common pitfalls that re-mortgaging and renewing present.
In Canada, a borrower could have up to 30 (think one-year mortgage terms) different mortgage terms within their total amortization period making it difficult to keep track of how much interest they are paying or have paid.
One area we see this, in particular, is mortgage renewals on the mortgage maturity date. For example, a mortgage may be initially set up at a 25 year amortization and so on the first maturity date of the first term, the remaining effective amortization is 20 years. A borrower will renew with another financial institution for a better rate but instead of renewing at the remaining amortization of 20 years, they re-set their mortgage amortization to 25 years because the monthly payments appear to be less.
What they have done in this instance is effectively reverse the progress they have made with respect to principal payments and unknowingly establish a way to pay far more interest. Remember: ‘Mortgage interest’ is considered top-heavy with most interest being paid at the beginning of the mortgage amortization period.
All things being equal, a borrower should not be deterred from renewing their mortgage with a better interest rate and with another financial institution if they are offering one since paying less interest is extremely cost-beneficial in the long run. They should, however, be extremely cognizant of the remaining amortization period at the end of their existing mortgage term and be cautious not to revert back to the original timeline allowed for repayment.
Additionally, each time a borrow renews their mortgage or refinances (borrowing more money against their property) they should obtain a copy of the amortization summary which outlines how much interest is paid during the term. If any prepayments are made during the mortgage term, borrowers should request a revised amortization summary for their records.
It’s not uncommon for banks to fail to provide revised amortization summaries to clients in person or by regular mail and the onus usually falls on the borrower to tally up the interest they are saving and paying. Of course, this can leave wide open areas for borrowers to falter on their mortgage repayment, which is the likely reason more people are indebted to financial institutions for much longer than they’ve hoped or even realize.
As a mortgage professional governed by the Financial Services Commission of Ontario, it is our mandate to provide amortization summaries at each step of the way. One of the benefits of working with an independent mortgage professional is the added service that is provided within the consultation area.
Have questions about your mortgage? Feel free to contact us at 647-773-4849 or by email at email@example.com.
Together, we can achieve mortgage-free for you!
By: Sarah Colucci
Senior Mortgage Agent, Lic. M14000929