If you’re worried about your mortgage payment going up because of rising interest rates, you’re not wrong.
Data from the Canadian Mortgage and Housing Corporation (CMHC) shows that while the size of the average new mortgage loan in Canada (originations and refinances) has shrunk by about 2% over the past year, the average payment has gone up by almost 18% - entirely thanks to rising interest rates.
If you’re facing a significantly higher mortgage payment at renewal, a possible solution is to extend the amortization period of your mortgage – the length of time over which your payments are spread out. By taking longer to pay your mortgage, you can reduce your monthly payments and make them more manageable. Whether extending your mortgage amortization is the best choice for you, however, is another question. Let’s take a look at whether taking longer to pay off your mortgage is the best solution to rising payments.
What is amortization and how does it affect my mortgage payment?
When you get a mortgage, there are two lengths of time you have to think about: the term, which is the length of your mortgage contract, and the amortization, the period over which payments are made.
When your amortization period is longer, your payments get smaller. For example, a $500,000 mortgage amortized over 25 years requires a principal payment of $1,667 per month. Extending the amortization period to 30 years reduces that commitment to $1,389.
Why would I want to extend my amortization period?
Because interest rates have risen rapidly over the past year, your monthly payment is likely to rise significantly at renewal.
Imagine you took out a $500,000 mortgage on January 1st, 2018, with the day’s best 5-year fixed rate of 2.79%, and amortized it over 25 years. Under this arrangement, you would have paid $2,313 a month and aimed to be mortgage-free in the year 2043.
Now that your mortgage is up for renewal, your lender has raised your mortgage rate in line with current values to 4.94%. The change will raise your payment by almost $500 per month, to $2,783.
|
Original mortgage |
After renewal |
||
|
Rate |
Payment |
Rate |
Payment |
|
2.79% |
$2,313 |
4.94% |
$2,783 |
But this payment assumes you’re continuing on with the original amortization. Ratehub’s mortgage payment calculator shows that if you extend the amortization to 25 years and plan to keep paying until 2048, you can get your payment down to a more manageable $2,461.
|
20-year amortization |
25-year amortization |
||
|
Balance |
Payment |
Balance |
Payment |
|
$425,635 |
$2,783 |
$425,635 |
$2,461 |
Check out the best current mortgage rates
Take 2 minutes to answer a few questions and discover the lowest rates available
What are the pitfalls of extending my mortgage amortization?
While extending your amortization will help keep your monthly payments in check, there are many downsides to this strategy.
The obvious drawback is the added time it will take to pay off your mortgage. With the above example, extending your amortization would extend your payments into the year 2048. If you’re 45 years old today, you won’t pay off your mortgage until age 70.
A less obvious downside is the extra interest you’ll pay. Without extending the amortization period, our example mortgage would cost an estimated $242,329 in interest over the remaining 20 years. Extending the amortization period to 25 years, however, raises the estimated interest cost to $312,664 – an expense of over $70,000.
|
20-year amortization |
25-year amortization |
||
|
Payment |
Total interest |
Payment |
Total interest |
|
$2,783 |
$242,329 |
$2,461 |
$312,664 |
In this example, extending the amortization by 5 years adds $70,335 to the total cost of borrowing over the lifetime of the mortgage.
There’s also an immediate cost to extending your amortization period, as it will require you to refinance your mortgage. While there are upsides to refinancing (like potentially getting a better mortgage rate or consolidating debts into your mortgage), there are fees to consider. In addition to paying a real estate lawyer to do the paperwork, you may have to pay for an appraisal and you’ll likely pay your existing lender a mortgage discharge fee. In all, the cash cost of refinancing your mortgage will likely range from $1,500 to $3,000.
How do I go about extending my amortization?
Because extending your amortization period will cost you so much time and money, I recommend avoiding it if possible. But if you absolutely can’t afford a higher monthly payment and are comfortable taking on the cost, extending your amortization period starts with a conversation with your lender. They’ll be able to help you examine your options and tell you how to go about making the change.
It’s also a good idea to check in with a mortgage broker for advice. Because mortgage brokers work with multiple lenders, they can access more options and get mortgage companies competing for your business. And their services are free for consumers, so there’s no risk involved.
What other options do I have?
If your rising mortgage payment is straining your budget, you may have other options aside from extending your amortization period.
- Look for other ways to reduce your payments. You might be able to lower your payment by getting a different interest rate or a different kind of mortgage product. You might also be able to lower your overall debt payments by using your mortgage to consolidate debt. A mortgage broker is a fantastic resource for exploring your options.
- Use a home equity line of credit to access cash. Depending on your budget, a home equity line of credit (HELOC) may give you the flexibility you need. Rather than reducing your monthly payments, you can use a HELOC to withdraw only the money you need, when you need it. Your mortgage broker can help you understand the benefits and risks of this strategy.
- Make more money. Okay, duh. But if you can increase your income enough to cover the difference in payments, you’ll be far better off over the long run. Consider asking for a raise at work, looking for a higher paying job, taking on a side hustle, or renting out a portion of your property.
- Sell your home. If you can’t afford your mortgage payments, you may need to reconsider whether owning a home is right for you. Consider whether downsizing to a smaller home, or choosing to rent instead, will be better for you in the long run.
The bottom line
Extending your mortgage’s amortization period can reduce your monthly payments, but at a significant cost. Consider other options before choosing this strategy, and ask a mortgage broker for advice to find out if there are better ways to make your mortgage payments more manageable.
Also read:
- The Trigger Rate: Everything You Need to Know
- Should I Buy a House in a Recession?
- The New Tax-Free First Home Savings Account
- Mortgages and Inflation: How Do They Affect Each Other?
- The Bank of Mom and Dad and Your Down Payment
- How Does the Rising Stress Test Impact Mortgage Affordability?
- Should You Switch From a Variable-Rate to a Fixed-Rate Mortgage?
- Is a Short-Term Fixed-Rate Mortgage Right For You?