Buying property in Canada often entails applying for a mortgage as well. With millions of mortgages available, it can be difficult to find one that suits you. Depending on how much you are willing to shell out, and for how long a period of time, your mortgage may vary.
On average, most Canadians opt for an amortisation period of 20 to 30 years. Such mortgage periods are available for application to any Canadian citizen that has a “low-ratio mortgage.” If this is something you are considering, then it’s important to think about the factors that come with it.
Here are some of the things you should be asking yourself before applying for a long-term amortisation.
1. What Is a Low-Ratio Mortgage?
First of all, let’s understand what is considered a low-ratio mortgage. In Canada, you must at least have a downpayment of 5 per cent, although some choose to pay larger. If you are one of those that pay 20 per cent or below, then you are considered high-ratio.
If you are high-ratio, then you will have to buy CMHC insurance, which protects your lender should you default on your mortgage. For high-ratio mortgages, the amortisation period falls around 25 years.
On the other hand, those that pay about 20 per cent or more down payment are known as low-ratio mortgages. In this case, you wouldn’t need default insurance, and amortisation periods are more extended.
2. What Is the Longest Mortgage Term?
In Canada, the average new mortgage will typically fall under a 25-year amortisation period. But of course, this is not the only length you are allowed to choose. If you please, Canadians are given the choice of up to 35 years of amortisation for mortgages.
The maximum recorded amortisation period was previously 40 years, but due to newly-minted regulations, the highest mortgage term you can get in this day and age is up to 35 years only.
3. How Much Monthly Payment?
One of the biggest benefits in a 35-year mortgage is there is a lower monthly payment. Because you are extending your amortisation period, you are given the freedom to spread out your payments over a longer period of time.
Let’s take a look at a $500,000, 25-year mortgage with an interest rate of 1.90 per cent. This kind of mortgage will typically cost you around $2,093 a month. However, with a 35-year amortisation, you can now pay as low as $1,629 a month.
4. How Much Interest Is Paid?
However, there are drawbacks to long-term mortgages as well. One of the more significant ones is that there is more interest paid for long-term amortisation. Given the same example, your interest will take you about $184,125, whereas a 25-year amortisation will only cost $127,962 interest.
On a brighter note, if you are wise with budgeting, you can easily plan for this as early as now. Make sure you consult a financial adviser or a mortgage agent so that you make well-thought-out decisions.
A 35-year mortgage is definitely something to consider if you are a low-ratio mortgage payer. Despite its higher interest, it will help you space out your payments in a manner that allows you to pay for them in your own time.
If you are planning on getting a long-term mortgage, consult with Ottawa Mortgage Services. We offer trust mortgage agent services in Ottawa for first-time homebuyers, self-employed individuals, and commercial clients. Contact us today for any financial help.