25-Year vs. 30-Year Mortgage Amortizations

by RateHub.ca 

When shopping for a mortgage, you’re probably most concerned with the interest rate and term. However, an equally important decision is the amortization period, which is the length of time it takes to fully pay off your mortgage.

25-Year Amortization

A recent Canadian Association of Accredited Mortgage Professionals (CAAMP) survey found that nearly two-thirds (68 per cent) of new homes purchased in 2012 have amortization periods of 25 years or less. A 25-year amortization is a good choice if your goal is to become mortgage-free sooner. Not only will you have your mortgage paid off five years sooner than you would with a 30-year amortization, you’ll also save thousands in interest.

With 5-year fixed mortgage rates at an all-time low, it makes sense to go with a shorter amortization period. When interest rates eventually rise, you’ll be better prepared by having paid off more of your mortgage principle at a lower rate. Not only does paying off your mortgage sooner promote positive savings behaviour, it helps you build up equity in your home sooner. Paying off your mortgage sooner also helps to provide a guaranteed rate of return. However, even though you’ll save thousands in interest, a shorter amortization period also means your monthly mortgage payments will be higher, than if you chose a longer amortization period. If you got sick or lost your job, you would need to be prepared to continue to pay larger mortgage payments.

30-Year Amortization

Although Finance Minister Jim Flaherty reduced the maximum amortization period from 30 years to 25 years, 30-year amortizations are still an option if your down payment is at least 20 per cent of the purchase price of your home. Not only will putting down more than 20 per cent help you avoid costly CMHC insurance, it also puts more equity into your home and gives you the option to choose a 30-year amortization period.

If you’re financially disciplined, a 30-year mortgage can make sense. If your lender has generous pre-payment privileges – including double-up payments, payment increases and lump sum payments – you can have your 30-year mortgage paid off in 25 years and pay no more total interest than the 25-year mortgage. If you’re a single first-time homebuyer, or you’re worried about losing your job, a longer amortization gives you the flexibility to make only the minimum mortgage payment should you run into financial difficulties. The key to saving with a 30-year mortgage is showing financial restraint and taking advantage of pre-payment privileges – if you only pay the minimum mortgage payment, you’ll end up paying a lot interest.

Which is Better?

If you were to only make the minimum payments on both, for the duration of the amortization period, a 25-year mortgage is the better option. Not only would you save $33,861 in interest, you’d also have your mortgage paid off five years sooner. But if you were diligent about making pre-payments, a 30-year mortgage could help you pay a little less each month and save more for the times you can put large sums of money towards your principle.