HawthorneVillager.com

Can anyone with a banking/financial background help me?
I initially got pre-approved with TD for a 25 year amortization loan at 5.75% (this was long before my closing).
Recently I went to a mortgage broker and secured the much better rate of 4.95% over 5 years with Firstline CIBC. The problem is. . .
my broker is encouraging me to take a 40 year amortization and to max out my prepayment options bi-weekly and annually instead of taking a 25 year amortization. He told me that it would be a better financial move as I would be paying down the principal faster. For instance:

my payments for 25 year would be approx. 1500/month
my payments for 40 year would be approx. 1250/month with $250 prepayment monthly.

Is there really a benefit to paying this way when it comes to interest? I can't find any info. online claiming that a 40 yr. amortization is beneficial for this. Wouldn't everyone be getting these terms if there was that benefit? HELP!

The benefit to doing a longer amortization with prepayments is that you have a lower monthly payment but are making the same headway. There is next to no difference in the amortization schedules, which you can verify for yourself by going to one of the bank websites and using their mortgage amortization calculation tools.

The pros of doing this are:

- Lower minimum payments so if you need to drop down for some reason, you can... especially handy if you are unsure about income levels (ie, commission based jobs).

The cons are:

- If you lack discipline to make those payments your mortgage will take longer to pay off.
- If you find yourself with an unexpected windfall, your prepayment room on the mortgage is now partially used. (ie, if you are taking out a $200,000 mortgage and are allowed to put 15% of the original amount on as an extra payment any year, that's $30,000 total. By paying $250/month, that number drops to $27,000 in available prepayment room).

Basically the pros and cons are so minor that I don't think it really matters one way or the other. One thing you might want to think about though is paying weekly instead of biweekly... that does add up over the 25 years. Again, check out the amortization tables for your actual numbers and decide yourself if it's worth it for your personal situation.

Steve raises a lot of good points. One other factor you need to consider is the Insurance Premium if you are not providing a downpayment of at least 25%. When your mortgage is insured (ie. CMHC) the premium increases with the longer amortization. Make sure you are asking the broker to confirm all of the fees involved.

_________________
Christina Jackson
Mobile Mortgage Specialist
TD Canada Trust
T: 647 292 7597
F: 905 377 1634
P: 866 767 5446
email: christina.jackson@td.com

Check with your banks about the extra payments with the 40 year amortization. Most places will allow your extra payments to be used to cover any delinquent payments.

Soooooo if after 5 years you have made 10 months worth of extra mortgage payments, if you loose your job or something happens, you can miss 10 mortgage payments with no penalty. Are they being nice? No, they just want to recover the extra interest that you have saved by making the extra payments in the first place. It is a nice security blanket.

Matt

The amortization does not affect this. It usually is determined individually by the bank. It is in their best interest to allow it. They will make more money on interest but not having your principle paid down faster

Matt

It depends on if the "extra" payment goes directly to principal... Many times bonus payments on a mortgage go directly to principal, so if that is the case in with this mortgage you will be paying more to principal each month, pay things off sooner, and save on the interest.

Marc

Where else would or could the extra payment go to? It has to go to the principle. All bonus payments go directly to the principle.

Matt

We are going with the 40 year amortization. Not exactly what I want to do but we are using it as a safety net since my eldest may start college in September and my middle one university in a couple of years. This way we have lower payments but can make extra when we have a few extra $. Hopefully when it comes time to renew in 5 years, we can then switch to a 25 year (although it will be the youngest's turn for college/university!)

Anyhow, we just don't want to get to tight with the payments and not be able to do other things...

Another option if you are making prepayments and the bank won't let you skip payments later is to just get a home equity line of credit. If, after the emergency, you can catch up and pay off the LoC, do so. If not, you could lump it into your mortgage during the next renewal. It depends on the timing, if interest rates go down between your mortgage and the renewal, LoC may be a lower interest rate... if it goes up, it will be a lot higher.

Thanks for all of the answers everyone. I don't think that there will be a difference either way so I will probably just go with the 40 year for now since it will give me some flexibility as a first time homeowner. I can't imagine myself having an extra $30,000 anytime soon so I am not going to worry about using my prepayment room right now. I just wanted to make sure that I was educated (by someone other than my broker) on all of the pros and cons before I signed the papers.