Pemberton Mortgage ABCs

Helping You Be an Educated Home Owner

For many Canadians, the home-purchase decision rests on one key factor - how much they can afford to pay every month. If you have a dependable, salaried job, the calculations are pretty straightforward. However if you're self-employed or earn commissions, your monthly cash flow is likely to be unpredictable. Maybe you're just beginning to earn an income - your job is secure, but for the time being your income is low. Or perhaps - under traditional financing - the home that's perfect for you is just out of the reach of your monthly cash flow.

A New Solution
Recognizing that many responsible potential homeowners simply don't fit the traditional mold, many lenders now offer mortgages with longer amortization periods. Traditional mortgages are amortized over 25 years, meaning monthly payments are set at a level that would reduce the total loan to zero after 25 years. The new breed of mortgages spreads those payments over 30, 35, or 40 years.

Effect on Cash Flow
Because the loan is paid off over a longer period, the monthly payments are lower, making your home purchase more manageable. For example, the monthly payment on a $150,000 mortgage, with a fixed annual interest rate of 5.50% amortized over 25 years, would be $916. Stretching the amortization over 40 years brings the monthly payment down by $149 to about $767.

Reducing the Interest Cost
The flip side to lower payments is that you pay more interest over the life of the mortgage. By taking advantage of prepayment options as your circumstances permit, you can reduce the total interest you pay. Consider these strategies to reduce the principal amount, and thus reduce the total amount of interest you'll pay.

  • Increase payment frequency. Switch from monthly payments to accelerated weekly or biweekly payments.
  • Top up your regular payment. Many lenders will allow you to increase your regular payment, once a year on any regular payment date, by as much as 100%.
  • Make a lump-sum prepayment. At the end of the mortgage term, you can prepay some or all of the principal without penalty.

These mortgages are just one example of the many new solutions available. Give a mortgage adviser a call and together you can review what's out there and find the solution that meets your needs.