For any reader who is unfamiliar with the term, the amortization period of a mortgage is the time over which the mortgage is to be completely repaid, assuming equal payments. This means that when looking, for example, at a mortgage with a 25-year amortization period, it would take 25 years to reduce the balance to zero, if all regular payments were made on time and the terms (payment, interest rate) remained the same.
As anybody who has ever had a mortgage knows, the interest component of a mortgage is often much greater than the principle component at the outset of payments. By extending your amortization, for example, from 25 years which is a standard amortization to say a maximum amortization of 35 years, several things will happen. This will decrease the amount of monthly payment you actually have to pay, which is why people extend the amortization for affordability reasons. However, it also greatly increases the interest component versus principle reduction of the mortgage.
Let’s take a look at what point in the duration of a mortgage you actually begin paying off more principle than interest.
Assuming a $100,000 mortgage at 4.30%
As you can see by this chart, even with a typical 25 year amortization it still takes 8.8 years to before you begin paying off a greater proportion of principle than interest.
Note of course that this assumes a standard monthly payment. By undertaking strategies like making lump sum payments, increasing the payment amount or adopting payment frequencies such as accelerate bi-weekly payments, you will achieve principle reduction much sooner.
If you have any questions on amortizations or how to pay off your mortgage faster please contact me.
John Shearer BA (Hons)
Mortgage Agent FSCO Lic# M09000725
C: 905-320-33474
B: 289-337-9718
E: John.Shearer@verico.ca
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