The long term loan strategy – prêt hypothecaire

Maybe you dont think it is such a good idea to take out a longer mortgage than is traditional, such as 25 or 35 years. These longer amortizations are now available and they can help you and your mortgage broker to find a mortgage strategy that is just right for you. Since spring of 2006, wer have seen a new type of mortgage (prt hypothecaire) that allows a much longer amortization periods of 25, 30 or 35 years.

Is taking out a longer amortized home loan the right thing for you?

You definitely dont want to pay off your home loan (prt hypothecaire) more slowly, and end up paying more interest on your mortgage. Most people still opt for the regular 15 to 25 year paydown schedule.

But in certain cases, it can be a good idea:

*Upcoming income
many people are just about certain about receiving a large increase in their future income, but they just dont have it yet. For example:
- a spouse is in school, but will be completing studies soon
- a salary is based, according to a collective bargaining agreement, on years of service
- the income of a self employed person has not yet showed up in his tax returns
* You prefer to be flexible in your payment schedule. Some people, such as the self employed, seasonal workers, or those who work on a commission basis prefer to keep their mortgage payments low so they can cover the periods when their income is lower. (prt hypothecaire)
* If you have a rental income property, you might prefer to increase your income each month by keeping the mortgage payments lower because of tax reasons and reinvest the increased income instead of building equity in the property.

How to shorten the real amortization period of a mortgage - hypothque.

Is it possible to shorten the amortization term of a 25 or 35 year mortgage or even a 15 year mortgage?

Yes, you can.

We share many strategies with our clients that allow them to pay off their mortgages much more quickly than the original amortization date.
Just because you commit to a mortgage note of 25 or 35 years with a lender does not mean that you have to pay it over 35 years. It is not the document that decides the actual repayment schedule, but instead the payments that you make over the entire term of the loan.

Therefore, if you want to make early payments, you can lessen the period of amortization of the mortgage.
Lenders will allow you to make prepayments of your loan, within certain limitations. This will allow you to increase the amount of payments you make on your home loan whenever you can. You can do this in two ways:
1. Make an increased monthly payment. Lenders will allow you to remit a larger amount on your mortgage by 20% per year and not be subject to any penalties.
2. Pay down on the principal. Many, if not most lenders will permit you to designate a certain additional part of your monthly mortgage as a principal payment, again, for up to 20% per year.

Look at the following scenario:

A teacher who is a prospective home buyer will receive his graduate degree in nine months, at which time he is eligible for an automatic salary increase. He thinks he is better off buying now rather than waiting until he can afford to pay a higher monthly mortgage payment. He can take out a 25 year mortgage at 5.4% and pay $1,209.17 per month, or a 35 year mortgage and pay $1,305.18. After two years, whenhis salary has increased by 20%, he starts paying an additional $200 on his mortgage. By paying $1,253.18 instead of $1,053.18 per month, and if he makes no other changes, his mortgage will be fully paid in 22.4 years, or 24.4 years in total. (hypotheque)

What conclusion can we draw from this?
Choosing an extended period mortgage (prt hypothécaire) amortization may not be for everyone, but this is one of the many tools that we can use to design a mortgage strategy that is just right for you.

Share this post