Ray Turchansky
Sun
One of the least-known secrets among new homebuyers in particular is the huge effect the amortization period of your mortgage has on the interest you will pay during its lifetime.
Decades ago, a young Edmontonian bought his first home, and after paying $21,492 in monthly mortgage payments over three years, was shocked to find out the principal had been reduced by only $1,485.
I learned to my horror that at the start of a 25-year amortization — the period over which the mortgage was to be paid off — that 93 per cent of the mortgage payments went toward interest. When only eight years remained in the amortization period, more than half the payments would go toward the principal.
“The key is still to pay it off as soon as you can, within reason,” says Adrian Mastracci, president and portfolio manager with KCM Wealth Management in Vancouver. “Get the monkey off your back in 10 or 15 years, then focus the rest of the time on getting your retirement nest egg up and running. I would do my darndest to keep it within 15 if I could. You just put so much money in your pocket.”
Mastracci uses the example of a $240,000, five-year closed mortgage charging 5.75 per cent interest. Paying it off at $1,268 a month over 35 years costs $313,410 in interest, while paying it off at $2,626 a month over 10 years incurs $65,165 in interest. That’s a whopping saving of $248,245.
And because more of your money goes toward interest than principal the longer the amortization period that is left, you save the most in interest with the least increase in payments when you start a mortgage.
In Mastracci’s example, reducing the amortization period from 35 to 30 years saves you $52,910 in interest while increasing monthly payments only $72. But going from 15 to 10 years in amortization saves only $42,005 while monthly payments go up by $640.
The federal government offers a handful of ways to reduce your amortization period in the article The ABCs of Mortgages, on the Financial Consumer Agency of Canada’s website.
THESE INCLUDE:
– Increasing the amount of your payments if you can afford it.
– Making payments bi-weekly over 52 weeks is essentially like making 13 instead of 12 monthly payments a year.
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