How to adjust your Mortgage Payments and Total Mortgage Payout

The top 2 variables affecting your mortgage:

1) The Amortization Period
2) Interest Rates

Amortization Period: Full time period until the mortgage debt matures (commonly 25 years, and now up to 40 years)

Increasing the amortization period lowers the monthly payment amount while increasing the total payout for the mortgage as less of your monthly payment is attributed to the principle debt and instead is applied to the interest. Decreasing the amortization period would have the opposite effect: higher monthly payments, decreasing the total payout on the mortgage as more of the payment is applied to the principal debt and less to interest payments.

Interest Rates: Whether a variable rate or a fixed rate.

Generally, the interest rate tied to the term increases with the length of the term—a normal yield curve (risk tends to increase with time); however, at this point in time the yield curve is very flat and inverts slightly at the 4 year horizon. This is significant because normally as the term increases, so does the monthly mortgage payment and total mortgage payout; as a result of the inverted curve, locking in a 5 year term will afford a mortgagor a lower rate than locking in at with a 2, 3, or 4 year term producing lower monthly payments and a lower payout.

The difference between the Term of the mortgage and the duration or amortization period of the mortgage:

Term: this refers to the time period negotiated by the mortgagor and mortgagee and the underlying contract negotiated. Usually this will be 5 years or less and will include details such as interest rates--fixed or variable, and at what rate; also included are any options such as early repayment without penalties.

Amortization period or duration: this refers to the entire length of the mortgage. Commonly this is 25 years; however, due to the fact that wages have not risen as quickly as housing costs in much of Canada or the past 20 years you can now amortize a mortgage debt over up to 40 years. This will normally require additional mortgage insurance however.

Other things that need to be considered when negotiating a mortgage: closed term vs open term, legal fees, property surveys, moving costs, and unforeseen costs.

Closed term means you can not pay the mortgage back without penalty over the term while open term means you are able to pay the mortgage back early--normally you will pay a higher rate for this option.

So how do I lower my payments?

1) Get a lower rate: consider a variable mortgage--interest rates tend to be lower. Also, consider a closed term--interest rates also tend to be lower this way.

2) Change the amortization period: how is this done?

Consider changing your payment frequency. It is surprising how much faster a mortgage is payed off when your payments are made weekly as opposed to monthly or semi-monthly. You can keep the same total payment for the month but divide it up into 4 weekly payments.

To make your payments lower you could also increase the amortization period; however, this will mean a larger total payout in the end.

Here are some useful links for estimating what size of mortgage you can afford and how changing a few options will effect your payments:

Canada Mortgage -Great Calculators for estimating what you can afford
Genworth

Don't forget that buying a home is usually the biggest investment a person makes in their life so make sure you get the most from your mortgage. Owning Real Estate tends to be a good hedge against inflation; however, investing in the stock market on average will yield a much greater return so do diversify.