Q: I’m buying a home for which I can afford payments on my current salary, but I’m nervous of high mortgage payments during possible future periods of lower pay. Is it a good idea to get a longer amortization period so that my payments are lower than I need them to be, and then accelerate payments when I’m earning full-time income?
A: Almost everyone’s goal is to pay off their mortgage faster. The shorter the amortization period, the higher your mortgage payments will be. And the quicker you pay your mortgage off, the less interest you will pay in the long term.
I always recommend my clients to go for a longer amortization period and use different strategies in order to pay off your mortgage faster. By doing this, it gives you the flexibility to keep your payments lower when you need it, and increase your payments and make lump sum payments when you have extra funds available.
For this reason, it is important not to focus solely on the interest rate of the mortgage you are getting but also on its terms and options. Most lenders have pre-payment options without paying a penalty. The pre-payment options allow you to make payments on the principal of your loan and/or increase the frequency of your periodic payments without a penalty. Let's look at these two options.
Each lender has different programs for pre-payments, which usually vary from 10 per cent to 20 per cent. For example, you can pay any amount within the approved percentage of the original value of your mortgage or increase your periodic payments once a year without paying a penalty.
Another tip that will help you reduce your amortization period is by increase your periodic payments. Instead of just paying once a month, opt for the option to pay semi-monthly, bi-weekly or even is possible weekly. By doing this, it will help you reduce your amortization period and pay more money toward principal than interest.
Therefore, when your income increases you can increase the amount of your mortgage payments and if you get a bonus or have extra funds you can make a lump sum payment. While your mortgage payments won’t be reduced, the amount you make as a lump sum payment will go directly towards the principal.
When getting your mortgage, it is not about how much you qualify for, but what you are comfortable paying on a monthly basis. A mortgage expert will help you find that best strategy that will suit your unique needs and, based on that, find the best mortgage for you.