 
|
|
|
Use
the link above
to load a printable
version of this document.
|
|
Looking for the perfect mortgage?
How
much does a mortgage cost? |
|
A mortgage of $100,000 amortized
over 25 years at 5% will cost the borrower about $214,116 by the time
it is paid off. When you consider the fact that in Canada, mortgage interest
cannot be written off on your income taxes, it becomes painfully clear
that the cost of this mortgage after-tax can be anywhere from one third
to double the original amount. Even at a relatively low rate of interest,
almost two thirds of the cost of repaying a typical 25-year mortgage is
paid as interest.
In general,
most mortgages are amortized over a 25-year period. In simple terms, one
easy way to reduce the amount of interest paid on a mortgage is to pay
it off faster. The sooner your mortgage is paid off, the greater the interest
savings because the length of time that the money is on loan is decreased.
To illustrate the effect of different
amortization periods on a mortgage, we have calculated the monthly payment
and interest paid on a $100,000 mortgage at various amortization periods.
|
Presuming
a loan of $100,000 at 5% interest amortized over:
|
|
Monthly
Payment
|
Amount
Repaid
|
Interest
Paid
|
Percentage
Interest
|
|
5
years
|
$1,884
|
$113,086
|
$13,086
|
13.09%
|
|
10
years
|
1,058
|
126,977
|
26,977
|
26.98%
|
|
15
years
|
788
|
141,862
|
41,862
|
41.86%
|
|
20
years
|
657
|
159,710
|
57,710
|
57.71%
|
|
25
years
|
581
|
174,481
|
74,481
|
74.48%
|
|
30
years
|
533
|
192,128
|
92,128
|
92.13%
|
|
As the above chart shows, by decreasing
the amortization period on your mortgage, you can drastically reduce the
overall cost of your mortgage. In the most dramatic sense, by roughly
doubling the monthly mortgage payment (i.e. five year versus 25 year amortization
period), the interest costs on the mortgage are reduced by a factor of
6. This amounts to interest savings of about $81,395.
| When
purchasing a home, it can be difficult to decide what amortization
period is right for you. This decision can be affected by many factors
including your household budget. It is a good idea not to over extend
yourself but keep in mind the long term benefits of foregoing a vacation
or making some lifestyle changes to increase your monthly mortgage
payment. Use the handy What
It Costs worksheet to get a closer look. |
Financial
Worksheet:
Home Ownership
& What it Costs |
|
TERM
AND RENEWAL
|
| Term
refers to the length of time that a mortgage agreement covers. This
should not be confused with the amortization period, which is usually
much longer. At the end of the term, the mortgage must be paid off
or renewed. Renewal generally refers to extending a mortgage agreement
with the same lender for a new term. Conditions such as rate of interest
may change. |
Further,
an amortization period can be changed when you renew your mortgage. Depending
on interest rates and the principal amount left outstanding at the end
of a term, your mortgage payment may be less when you renew. Consider
keeping your mortgage payment the same and reducing the amortization period.
There is no better way to reduce the interest cost of your mortgage than
by reducing the period it takes to pay it back.
With rare
exception, all the major mortgage lenders in Canada offer five, 10, 15,
20 and 25 year amortization periods. In the United States, 30-year amortization
periods are not uncommon. Having a longer amortization period has the
advantage of allowing for smaller monthly payments. However, the disadvantage
of higher interest costs also exists.
|
What
is a mortgage?
|
Changing
the
payment schedule
|
|
