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Tuesday, August 30th, 2016

Why Your Trusted Mortgage Broker in Vancouver May Recommend a Shorter Amortization Period

Why Your Trusted Mortgage Broker in Vancouver May Recommend a Shorter Amortization Period

Before new rules decreased the maximum amortization period on default insured mortgages from 30 years to 25, (and maybe surprisingly), there were still people choosing amortization periods less than the newly mandated maximum.

While attitudes regarding homeownership have changed over the last few decades, there may be something to learn from prior generations. There was a time when paying down a mortgage as soon as possible was at the forefront of people’s minds.

Although young people today seem less focused on paying down their mortgages than generations of old, solid evidence points out that paying down your mortgage more quickly can be very beneficial. You may want to consult a trusted mortgage broker in Vancouver to find out what the benefit would be for someone in your situation.

While many individuals may continue making mortgage payments into their retirement years, this can add substantially to the cost of owning a home. This could also make retirement quite a bit less enjoyable.  A shorter amortization period will allow you to pay off your home sooner and decrease interest expenses along the way.  Essentially, a shorter amortization period is money in your pocket.

Assuming an interest rate of 5%, a 25 year amortization instead of a 30 year amortization on a mortgage of $100,000 could save you more than $17,000 in interest over the life of your mortgage. That’s a lot of money that could otherwise be put into an RRSP to improve your lifestyle upon retirement.

Unfortunately the new rules will also make it a little more difficult to purchase a home for those in a less stable financial position. Those in this position may need to spend a little more time building a larger down payment before making the purchase.

Being able to afford your mortgage payments should also be at the forefront of your mind. It is best to not be unprepared in the chance that interest rates go up. Depending on where you live, you may want to consult a trusted mortgage broker in Vancouver for information on how your mortgage payments will change if interest rates go up or down.  Taking your situation into consideration, they may suggest a fixed rate term mortgage.

While paying off your mortgage quickly seems like pretty generic advice, it can be very beneficial when done intelligently and in the right situation. We say the “right situation” because it is not always in the best interest of the mortgage holder to pay off their mortgage as quickly as possible.

 As mentioned above, it’s very important to consider how your financial situation will be affected if interest rates rise. You should also consider whether there’s a better way to use your cash than by making larger mortgage payments.

If you suspect that you might land in hot water if interest rates rise, or if you do have a better use for your funds, then getting the shortest amortization period possible may not be in your best interest.

A shorter amortization period will only save you money if you don’t have a better alternative for the additional funds that you would be using to pay off your mortgage more quickly.

A trusted mortgage broker in Vancouver can help you navigate your way through some of the following questions and help you decide. Can you invest the same funds to earn a higher return than the cost of interest on your mortgage? Do you have an emergency pool of funds to help you survive in case you get laid off from your job? Do you have extra expenses related to your family?

In addition, if you rent out investment property and need to maximize cash flow by minimizing mortgage payments, if you’re an entrepreneur who needs funds to invest in your own business, if you’re sales person who’s paid on commission and sales are not even throughout the year, if you’re an investor who makes a high return on your assets, or if you have a family which may need contingency funds in the case of emergency, than a short amortization period may not be best for you.

Before jumping into a mortgage with a short amortization period, you may want to consult a trusted mortgage broker in Vancouver to discuss whether the option is right for you.

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