When you become a homeowner, there will be many home-related expenses that you will have to pay regularly, from when you start paying your mortgage until you decide to sell your home. What is the most important expense? The mortgage itself. No matter what you do at home, whether you mow the lawn or simply sit in front of the television, the financial aspect of home ownership should always be somewhere in your head.
A mortgage allows a Canadian consumer to buy a house and transform it without having to spend all his savings. Instead, the consumer will pay the house in monthly installments for a number of years (usually 25-35 years). This process is known as depreciation. However, as part of depreciation, homeowners will also have a mortgage term, at the end of which they will have a chance to renew their mortgage loan. In fact, there is only one difference between the mortgage “term” and depreciation. So we’ll talk a bit about this difference, as well as the mortgage payment process.
Make your mortgage payments
Before looking at the differences between the term mortgage and the amortization period, let’s talk a bit about how your mortgage payments will work. Be aware that the mortgage process, interest rates (variable or fixed), lump-sum payments (if permitted by the lender), and payment methods vary depending on the specifications of your chosen lender. So, while doing research on lenders, be sure to ask them about the different options they have to offer.
In order to start making regular mortgage payments, you and your lender will likely make a recurring direct transfer, in which the funds will be drawn directly from your bank account each time your mortgage payment is due. The process is quite simple, especially if you already have an open bank account with the same bank. If you decide to do business with a new bank or lender, you will be told how to make your payments as efficiently as possible.
Some lenders may also allow you to make lump-sum payments at specific times during the term of your mortgage. This means that homeowners will be allowed (usually after one year) to make a one-time lump sum payment towards their mortgage settlement. A lump sum payment will not directly affect your monthly payments, but it will decrease the total amount you owe and, therefore, the length of your amortization period. In simple terms, a lump sum payment will help you repay a mortgage loan faster and save you interest.
Know that almost all lenders do not allow borrowers to make lump-sum payments when they want and if this is possible you will probably have to pay a penalty fee. The reason for this is that when you sign a mortgage agreement with a lender, you agree to pay him a specific amount of interest, which means that the lender will make a specific amount of money on your mortgage. If you make several additional lump sum payments and pay back your loan faster than expected, your lender will earn less money with your mortgage.
What are accelerated payments?
Because of the financial convenience, this provides, most Canadian homeowners will choose to repay their mortgage in monthly installments, for a total of 12 payments per year. To simplify things, let’s say your monthly mortgage payment is $ 1,000. This means that with a typical monthly payment, you will be repaying $ 12,000 in mortgage payments a year, spread over 25 to 35 years. So if your mortgage is $ 300,000, you should be able to pay it back in 25 years. Just be aware that in Canada, real estate rates have been rising steadily in recent years. This figure is somewhat realistic considering the interest costs and variable rates of each province or territory.
However, by choosing to make “accelerated” payments, you will be able to reduce your amortization period. Essentially, by increasing your payment rate, each year, you will add extra money to pay off your mortgage. You can choose to make accelerated weekly or bi-weekly payments. With either of these choices, you will be able to breathe a bit with your mortgage payments based on the number of weeks in a year rather than the number of months in a year. This will increase your pay rate and decrease your depreciation.
What is the best way to pay off your mortgage?
There are five mortgage payment options to choose from. In order to make this simple, we will use the same example for all options. Let’s say your total annual mortgage payment is $ 12,000.
Monthly: You divide your annual mortgage payment by the number of months in a year. This means that with this option you will make a mortgage payment of $ 1,000 a month. Because of the convenience that this option offers, monthly payments tend to be the payment option that Canadian homeowners prefer.
Weekly: There are 52 weeks in a calendar year. So by choosing this option, it means that you will make 52 mortgage payments a year. For this option, you divide your annual payment by ($ 12,000) by 52, which means that your weekly payment will be approximately $ 231.
Biweekly: With this option, you will make mortgage payments every two weeks, rather than weekly or monthly. If your annual mortgage payment is $ 12,000 and there are 26 2-week periods in a calendar year, divide your annual payment by 26 and you get approximately $ 462 to pay all two weeks.
Accelerated Weekly: With an accelerated payment rate, you’ll save on interest over time and pay off your mortgage faster. So you have to take your monthly payment of $ 1,000, and divide it by 4, the number of weeks in a month, and then multiply that by 52, the number of weeks in a year. This means that you will make 52 mortgage payments of $ 250 in one year for a total of $ 13,000.
Essentially, you will make an additional $ 1,000 on your mortgage in one year and pay it back faster.
Bi-Weekly Accelerated: This type of payment is roughly equivalent to an accelerated weekly payment, but instead you will, of course, make your payments every two weeks, which can sometimes be easier to manage.
What is the difference between the term of a mortgage and depreciation?
As mentioned above, there is only one major difference between the term mortgage and the amortization period: it is the duration of these.
A mortgage term refers to the period during which you will mortgage a home through a single lender, paying a specified rate (principal and interest) while complying with the various other terms and conditions listed in your contract. A typical mortgage term can be from 6 months to 10 years. During this time, you will need to make your mortgage payments to avoid defaulting. The shorter mortgage terms will have a better rate than the longer ones, but again, it depends on your lender. Once your mortgage term is over, you can choose to request a contract renewal with the same lender, and manage the changes to bring in your rate as well as the new terms, while paying the remaining principal on your home. If you are not satisfied with your current terms or if your lender refuses your renewal request for any reason, your mortgage term will end and you will be able to go to another lender.
The amortization period refers to the term of the full mortgage, which is the time it takes to pay the total cost of the home. Over the years, by making mortgage payments, you will slowly amortize the cost of ownership. In Canada, a normal amortization period depends on the amount of the down payment you paid and whether you had to buy mortgage insurance or not. It usually takes 20 to 35 years to pay off a mortgage. If your mortgage is considered “conventional”, it means that you have made a down payment of 20% or more for the home, and you do not have to purchase mortgage insurance. However, if your mortgage is a high ratio, your down payment should be at least 5%, but less than 20%. High ratio mortgages are generally more affordable, depending on the price of the house. However, since high-ratio mortgages are riskier for the lender, borrowers must purchase mortgage default insurance in the event that they are unable to make their payments.
In 2012, the maximum amortization period allowed for high ratio mortgages was 25 years and 35 years for conventional mortgages. In Canada, the best example is a five-year mortgage term and a 25-year amortization period. Once the amortization period is over, you will have paid for all of your home and the associated costs. Congratulations! The house is officially yours …