6 FACTS ABOUT MORTGAGES

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Here are 6 facts about mortgage amortization:

1. Longer amortization can make you money: Mortgages are often the cheapest form of capital available to the general public (lower than secured loans or lines of credit). By paying less every month for a mortgage, a borrower can reinvest the savings in an RRSP and get more back in taxes than interest savings from a shorter amortization.
2. Longer amortization does not mean you must be in debt longer: Most mortgages have favorable prepayment options that allow you to pay back a mortgage considerably faster than the length of the amortization. Good prepayment options can shorten your amortization to shorter than 5 years!
3. Longer amortization means more optionality: Many borrowers don’t have stable, predictable income. These borrowers can benefit from longer amortization if they have a bad year and need to pay less every month. In good years, they can use prepayments to accelerate their mortgage payments.
4. Longer amortization increases the risk on the side of the lender, not the borrower: In corporate lending, a lender will shorten amortization if the borrower is seen as risky. Low-risk borrowers can get loans with no amortization at all. Longer amortization is lower risk to the borrower since the required debt service is lower and the borrower has more excess cash.
5. The shorter amortization policy is a form of collusion between lenders: Longer amortization is riskier for the lender, so lenders will compete with each other by extending amortization. Forcing shorter amortization mandates a collusion between lenders since it prevents that kind of competition.
6. High Net-Worth individuals are able to get long amortization products that others can’t: Longer amortizations have not been eliminated since High Net Worth individuals are able to get longer amortizations by finding lenders that are not covered by specific policies, working with “friendly” institutions that vie for their business or borrowing through a legal loophole like setting up a corporation for the specific purpose of borrowing funds.