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Tuesday, July 19th, 2016

Shorter mortgage is money in your pocket

CALGARY, AB – Now that the dust has settled a little on the new mortgage lending rules, it’s time to put them into perspective.

For those getting into home ownership later in life, a longer amortization could mean making payments into retirement.

For those getting into home ownership later in life, a longer amortization could mean making payments into retirement.

This is not the first time mortgage amortizations have been limited to 25 years.

Industry veterans know people still bought homes before the amortization rules were relaxed and their main goal was to pay off their mortgage as soon as possible.

More recently, attitudes have changed, and these new rules will help us regain that focus and help us to avoid carrying a mortgage into our retirement.

The new generation tends to put homeownership on the back burner and may not get on the property ladder until their 30s. If you are in this position, mortgage amortizations of 35 or 40 years mean you could still be paying off your mortgage into your retirement years. With the limiting of amortizations to 25 years, you will be in a better position to enjoy your retirement.

Reducing amortizations from 30 years to 25 years (this reduction applies to default insured mortgages only) means that for every $100,000 of your mortgage at an interest rate of 5%, your payment will go up by $47.91 a month. However, you will also save more than $17,000 in interest costs per $100,000 over the lifetime of your mortgage.

Think of what that kind of money could buy; for instance, putting it into RRSPs could significantly improve your financial situation in retirement.

This is money in your pocket and peace of mind that you will be mortgage-free sooner.

Will these new rules make qualifying for a mortgage more difficult?

In most cases it should not prevent you from purchasing your home, but you may need to build a larger down payment to keep within the bank’s debt servicing requirements.

Ensuring you can afford your mortgage is very important — you don’t want any surprises if interest rates rise.

A great way to protect yourself from rising rates is to lock in your mortgage rate and by choosing a fixed-rate term, you will be protected until your mortgage comes up for renewal.

A key piece of advice is to consult with your mortgage specialist — start planning now and build your strategy to make the move from renter to homeowner.

Laura Parsons is an area manager of mortgage specialists at BMO Bank of Montreal. If you have a question about home financing, reach her atlaura.parsons@bmo.com

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