25 Year vs. 30 Year Amortization: Which Should I go with?
If you’re putting 20 percent down on a property, you have a choice: should I go with a 25 year or 30-year amortization? The decision isn’t as simple as it may seem. There are several things to consider.
25 Year Amortization
A 25-year amortization is the default mortgage option for most Canadians. In fact, if you’re putting less than 20 percent down and taking out an insured mortgage, a 25-year amortization is the maximum length you can go with. (This is due to rule changes put in place by the government a few years ago.)
If you’re putting down 20 percent or more on a property and taking out a conventional mortgage, that’s when you get the choice of going with a 25 or 30-year amortization.
A 25-year amortization makes the most sense when you want to save on interest and get the most competitive interest rate.
You’ll save on interest with a 25-year amortization because you’re paying off your mortgage in 25 years instead of 30 years. By paying off your mortgage five years sooner, you could potentially save yourself thousands in mortgage interest.
Mortgages with 25-year amortizations also tend to come with more competitive mortgage rates. Depending on how much you’re putting down, you might get a mortgage rate that’s 0.1 percent to 0.25 percent better than the 30-year amortization.
This lower mortgage rate again helps you pay down your mortgage sooner.
30 Year Amortization
A 30-year amortization makes the most sense when you’re most concerned about cash flow. A 30-year amortization can help you lower your mortgage payments. It helps to go over an example with numbers together.
If you have a $500,000 mortgage at 2.39%, your monthly mortgage payment would be $2,274 over 25 years or $1,999 over 30 years. That’s a savings of about $275 in monthly cash flow.
(Note: The mortgage rate is the same for both the 25 years and 30-year amortization in this example, but as mentioned usually, the rate of the 30-year amortization is at least 0.1 percent higher.)
For some people, the $275 in extra monthly cash flow makes sense. Raising kids is expensive. If you have a newborn, an extra $275 in monthly cash flow could help you cover extra expenses, such as child care and baby clothes.
If you’re a real estate investor, a 30-year amortization can make sense as well. With a lower mortgage payment from a 30-year amortization, it will be easier to qualify to purchase further properties, such as a cottage or rental property in the future.
The Bottom Line
Not sure whether the 25 year or 30 year amortization is right for you? Let our mortgage experts run the numbers and help you decide the right choice.