Practical Amortization Choices

amortization-comparisonShorter amortizations can cost you less interest and help you pay off your mortgage sooner.

If that’s a revelation to you, then here’s another story you’ll appreciate: Shorter mortgage is money in your pocket

Since we’re pointing out the obvious, we should also note that making a bigger down payment and buying a cheaper house save interest as well.

This is the type of generic advice that some mortgage commentators like to give while applauding the recent amortization reductions. Few media types have acknowledged that extended amortizations are actually a valuable tool when used intelligently.

It seems that publicly advocating longer amortizations has become semi-taboo, almost like promoting legalized marijuana. But a borrower’s best interests are absolutely not always served by the shortest mortgage.

Unlocking money wallet salesWhen choosing an amortization, folks must ask two questions right off the bat:

  1. Can I comfortably afford my mortgage if rates rise 3%, and
  2. Is there a better use of my cash flow than making larger payments on my mortgage?

If the answers to these questions are both yes, then the longest possible amortization may be appropriate.

In truth, lower amortizations provide net savings only if you have no better alternatives for the money that would have gone towards paying down your principal.

To put it another way, eliminating your mortgage quicker can actually cost you money if:

a) the return on your excess disposable income is greater elsewhere, and/or

b) you have insufficient contingency funds.

Certain types of people need to pay extra attention to the opportunity costs of shorter amortizations. They include:

  • Investment property owners (who need to minimize payments to maximize cash flow)
  • Self-employed borrowers (who need to reinvest in their business)
  • Commission earners (who need to build contingency funds for lean months)
  • Investors (who invest in higher-returning assets)
  • Families (who need to pad their contingency funds, pay down higher interest debt, top up registered retirement accounts, or build education savings).

So before you jump on a shorter amortization because talking heads say it’s the right thing to do, carefully consider if lower payments would further your financial goals more.


Rob McLister, CMT

  1. Well said Rob! The govt needs to consider that investment property owners like the longer amorts as the interest is tax deductable and I need to maximize my cashflow.
    If I really want to pay down my investment property mortgages faster, I’d simply make lump sum payments (and I do when I have excess cash balanaces and nothign else to do with the cash). But being able to maximize cashflow is my objective and I should be able to choose if I want to reinvest my excess cash into my investment properties, into the market, or into a business interest. Forcing me to pay down my investment mortgage and not giving me a choice is plain stupid… The govt needs to realize that all mortgage holders are NOT the same and we shouldn’t be lumped together into one basket.

  2. I think the problem is many people intend to use a lower amortization to free up monthly money for investments, etc, but very who end up taking longer amortizations for the reasons mentioned above, actually use their “spare money” in a financially advantageous way. Of course there ARE folks that are responsible and take full advantage of the longer amortizations to free up cash flow for other investments. But for the most part, I would imagine the good intensions people have for their extra monthly cash due to smaller payments, actually goes towards a new deck, hot tub and 3D TV (or even worse, whittled away on fast food and frivolous shopping).
    Long story short, take the shorter amortization unless you KNOW that you’re going to use the cash flow to further your financial goals.

  3. “Forcing me to pay down my investment mortgage and not giving me a choice is plain stupid… The govt needs to realize that all mortgage holders are NOT the same and we shouldn’t be lumped together into one basket.”
    The government isn’t forcing you to do anything. Put down enough so you don’t need mortgage insurance and then negotiate a longer amortization with your bank.
    I’d argue that mortgage insurance should not be available for investment properties, but that’s another argument.

  4. We have always taken the longest amortization available and then increased our payments 20%. We’re paying our mortgage off faster than someone with a 25 year amortization but are still able to reduce payments if funds get tight.

  5. I put down 20% minimum on all my deals. I own 5 Vancouver single family and multi family units… I don’t have mortgage insurance on any property and I never have. Thanks to increase in value, my overall debt to equity ratio for the portfolio is approx 60%.
    I’m now “forced” to take a 30 year amort even though I could “choose” to take a 35 year a year ago.
    Yes, I’m being “forced” by the govt to pay down my mortgage faster.
    I was planning to take out some equity on a mortgage I have coming due in 6 months to franchise a restaurant. I’d love to be able to refi it and take a 35 year amort…. But alas, I’m being “forced” to take a 30 year.

  6. You may be forced into a 30 year mortgage, but it’s not the evil guv’mint that us forcing you. If you don’t need insurance then your mortgage contract is a private contract between you and your lender.

  7. Hi Guys,
    I have a 25 years mortgage with a 5 year term expiring next year. I’m planning to shorten my amortization to 15 years at the end of my term to save interest. My dilemma is If I choose 15 years instead of 20, Do I still have the flexibility to extend my amortization when the new term expires?
    Or do i have to take a minimum of 10 years amort at the end of the 15 year term? (15 years amortization less 5 year term)

  8. When you refinance your mortgage, you are ending your old mortgage and entering into a new one… If you sign up for a 10 year amort today, at the end of 5 years you can go extend back to 25 years as you are entering into an entirely new mortgage.
    Another way to save money on interest, is to take the longer amoertization and make lump sum prinicple payments whenever you can. The advantage of this, is say you run into a cash crunch and need some extra cash – with a short amortization, you have no choice but to make those larger payments. But noone forces you to make those prinicple payments and you can concerve cash with those smaller mortgage payemnts if you have the longer amort.

  9. Tim:
    You noted that “for the most part” people don’t follow through on their good intentions. That made me wonder, do you have statistics on the ratio of people with 30-40 year ams that fritter away their payment savings on discretionary consumer spending? I have never seen any surveys on this.

  10. If you pay your mortgage on time every time, it’s no one’s business what amortization you choose. If people want to buy a sailboat instead of pay off their mortgage faster that’s their business. As long as taxpayers aren’t exposed to unnecessary risk, the mortgage market should be left to its own free market devices. Hell, if a borrower is strong enough why not allow a 100 year amortization? Banks sell interest only HELOCs already anyhow.

  11. We’re not even necessarily talking about folks with 30-40 years amortizations here… Just people taking out longer ones than they really need to invest, etc.
    I don’t think we need to do a formal survey to know more often than not, people spend rather than invest. That being said, “in my experience” might have been a better phrase than “for the most part” …

  12. Then you get problems like clients want the 2.69% three year rate at Street, but want a ten year amortization and Street has a minimum of 18. Can’t win!!!

  13. Hi Leo, thanks for your answer.
    I think if you pick long amortization it will result to higher interest payment which defeats the idea of saving more.
    In my case, i can pick lower amortizations. I appreciate your suggestion on the long amortization and paying lump sum every year. I need to do the math before doing this first. Thank you.

  14. My issue is that noone wants to touch me these days. “I have too many properties” for the ones we’ve tried that still offer longer amorts… Apparantly my 6 figure day job and my $2mil of equity is too high risk for some lenders…
    I love my Scotia STEP on one property which allows me a LOC + 3 seperate mortgages – 30 years max according to them… Can I somehow negotiate 35? I asked but was told no. Noone else offers such a great product.

  15. Hey mbalolong,
    Amortization does not affect the amount of interest you pay per year… It only affects how many years you pay it for!
    If you have a mortgage of $100K at 3.0% and a 30 YR AM and increase your payments or set it up as a 15 YR AM and keep the contract payments you pay the SAME amount of interest. Most Mortgages are compounded semi annually so as long as you make the extra payments before the compounding periods there is no gain by contracting yourself to a shorter amortization.
    Check out the math yourself using an amortization calculator… the benefits of the longer AM will be more flexability at renewal as the amortization must remain the same to not have to pay for legal fees etc. again.

  16. Apparantly my 6 figure day job and my $2mil of equity is too high risk for some lenders…
    Clearly. So why are you complaining about the government if it has nothing to do with them? The lenders have decided they don’t want to take the risk. That might not agree with your plans, and you might disagree with their assessment, but that’s the free market at work.
    30 years max according to them… Can I somehow negotiate 35? I asked but was told no.
    Right. So Scotia has done a risk analysis and decided that they would rather not offer 35 years based on that. You don’t think you’re a risk at 35 years, but they do. Unfortunately the people with the money have the final say.

  17. If you pay your mortgage on time every time, it’s no one’s business what amortization you choose.
    As soon as the government insures your mortgage, it becomes their business.
    Hell, if a borrower is strong enough why not allow a 100 year amortization?
    Sure. Is there actually any regulation that would prevent this? I’m sure Bill Gates could negotiate a 100 year mortgage from most lenders.

  18. I’m griping about the govt becasue Scotia told me they no longer allow 35 year amorts as a policy due to government rule changes.

  19. Has anyone else here been able to get a 35 year amort at Scotia recently (with 20%+ equity)? I tried 2 months ago and was told they don’t do it anymore period.

  20. “You don’t think you’re a risk at 35 years, but they do.”
    That is technically not accurate. Everyone including Scotia knows that some people are not a risk with a 35 year amortization. They just choose to apply a blanket amortization policy to all borrowers.

  21. They just choose to apply a blanket amortization policy to all borrowers.
    True. But why? Not because they don’t want the business of those non-risky 35 year mortgages.
    It’s because _overall_, they feel that the additional risk is not worth the additional profit.

  22. Actually you do pay more interest per year with a longer amortization.
    Run two amortization schedules at 25 and 35 years and you’ll see what I mean. The interest is only the same in the first month. After that you pay less principal each month with a 35 year am. As a result your monthly interest is calculated on a higher balance. Hence more interest.

  23. No. If anything, it’s because they feel that the additional revenue from non-risky 35 year borrowers doesn’t warrant two policies.
    There are other reasons too, including political ones.

  24. M-broker… you obviously did not read my post!
    I said there is no difference between an excelerated payment registered for lets say 35years vs a shorter AM at the same rate if you increase the payments of the 35yr AM to the same amount… what you register the amortization for is irrelevant to interest savings!!
    It is the monthly payment that that determines interest savings!
    When you register for a longer amortization it will give more options at renewal in the event of higher rates…

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