Looking at Amortizations

One of the most common subjects I have been discussing with clients about in the last few weeks is amortization, so today I wanted to clarify the meaning of it, show you the different options available and provide a few examples. A common misperception is that you pay significantly more interest on a monthly basis by choosing a longer amortization, however this is not true. Although your interest cost over the long term is greater because you are increasing the amount of time over which your mortgage will be paid, it’s how much you pay to principal that makes a huge difference. Lets take a look at an example of a $300,000 mortgage with an interest rate of 3.99% over a 5 year term, amortized over 25 years. These are numbers are taken from our TD Mortgage Payment Calculator.

Principal: $300,000
Payment frequency: Monthly
Mortgage type: Fixed rate
Interest Rate: 3.99%
Amortization: 25 years
Total Payment: $1576.43
Total P+I Payment for term: $94,585.80
Total Interest Cost for Term: $55,697.22
Total Principal Repayment for Term: $38,888.58
Mortgage Balance at End of Term: $261,111.42

Now let’s take a look at the same example, but amortized over 35 years.

Principal: $300,000
Payment frequency: Monthly
Mortgage type: Fixed rate
Interest Rate: 3.99%
Amortization: 35 years
Total Payment: $1320.64
Total P+I Payment for term: $79,238.40
Total Interest Cost for Term: $57,290.85
Total Principal Repayment for Term: $21,947.55
Mortgage Balance at End of Term: $278,052.45

So as you can see from the examples above, there’s not a significant difference in interest cost between the two scenarios for the first 5 years. The difference in interest cost is $1593.63. But the difference in paid principal? $16941.03. So why would anyone choose a 35 year amortization over a 25 year amortization? Flexibility. By choosing a maximum amortization of 35 years, it allows you to reduce your monthly payments. Not sure which option to go with? Talk to your mortgage advisor or give me a call and I can help you crunch the numbers, and determine what makes most sense for your unique situation. No matter what type of mortgage financing you are looking for, it makes sense to speak to me first. If you have any questions or would like to leave a comment, please do so below. Thank You!

Sincerely,
Josephine Ng
www.tdmortgage.wordpress.com