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A Fundamental Question

Amortization ScheduleWhat is your level of knowledge with the following term: amortization?

  1. very familiar
  2. somewhat familiar
  3. not very familiar
  4. not at all familiar

In 2013 BMO posed this question to Canadians across the country. The results were noteworthy.

Over half of Canadians (52%) were not even somewhat familiar with the word “amortization.”

That’s fairly remarkable given that almost 70% of households are homeowners–most of whom have had a mortgage.

Should people even be allowed to enter a mortgage if they don’t comprehend “amortization?” I say that partially tongue-in-cheek, but it’s sort of like managing your own stock portfolio and not knowing what “dividend yield” means. Maybe every mortgage application should include this as a skill-testing question.

The issue is fundamental. If someone doesn’t understand amortization, he/she may not know how to minimize it. That has implications for their interest paid, equity and retirement. (Mind you, some will know the concept of amortization but not know what it’s called.)

It’s certainly a good question to ask mortgage clients during an initial consultation, and especially first-time homebuyers. We sometimes do a disservice to borrowers when we take for granted what they do and don’t know. You can imagine how many of those aforementioned 52% also don’t understand IRD penalties, blending, porting and so on…

Rob McLister, CMT