Real Estate

If approved for mortage, can I setup the amortization?

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  • Aug 9th, 2016 12:17 pm
[OP]
Banned
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Jul 17, 2008
11042 posts
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If approved for mortage, can I setup the amortization?

Say the bank approves me for 250000$. I want to only have 5 year amortization. Are they allowed to deny me based on my salary, while they would have no problem giving me the mortgage on a 25 year amortization?

Would banks give you a harder time the shorter the amortization since they aren't making as much off interest? I know I can't just take whatever amortization because unlike car loans, you can't lump-sum pay as much as you want since you will get penalties since the banks can't get their fat profits from the interest.

Basically I want to max out the mortgage I pay monthly to be very close to what I bring home. I have my savings funds for emergencies and I live very frugally. Besides the daily expenses and bills which are pretty consistent I want to use ALL the remaining money into the mortage. But I can see how the banks will give you the whole spiel that your mortgage should be a max 40% of what you bring home or whatever. For me, that is definitely WAY to low (and too much interest paid for nothing)
6 replies
Deal Guru
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Mar 23, 2008
13002 posts
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Edmonton
Most mortgages allow you to double up your payments and have a significant lump sum payment once per year (like 20% of the original principal). Between those two things, you can take care of your mortgage in 5 years, no matter what the original amortization.

You could also get an open mortgage. The amount approved would still be based on a 5 year closed plan, but you can pay it out any time.

C
Deal Addict
Jan 13, 2014
2256 posts
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Calgary
Depends on the lender. You could double up on the payments or take on open or variable mortgage and put down extra payments once a month.
Deal Fanatic
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Feb 2, 2014
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Toronto
Messerschmitt wrote: Say the bank approves me for 250000$. I want to only have 5 year amortization. Are they allowed to deny me based on my salary, while they would have no problem giving me the mortgage on a 25 year amortization?

Would banks give you a harder time the shorter the amortization since they aren't making as much off interest? I know I can't just take whatever amortization because unlike car loans, you can't lump-sum pay as much as you want since you will get penalties since the banks can't get their fat profits from the interest.

Basically I want to max out the mortgage I pay monthly to be very close to what I bring home. I have my savings funds for emergencies and I live very frugally. Besides the daily expenses and bills which are pretty consistent I want to use ALL the remaining money into the mortage. But I can see how the banks will give you the whole spiel that your mortgage should be a max 40% of what you bring home or whatever. For me, that is definitely WAY to low (and too much interest paid for nothing)
Yes, if your income cannot support the monthly payment with a shorter amortization, you will not be approved for that mortgage.

And yes, some lenders have minimum amortization periods (some only go as low as 18 years).

The good news, however, is that most lenders allow you to pre-pay an additional 20% of the original mortgage amount each year. This means that you can payoff the entire mortgage within 5 years (20% x 5 years = 100%).
Kevin Somnauth, CFA
Principal Broker - First Toronto Mortgage - MA (Ontario #13176, BC #X301007)
Real Estate Salesperson - Century 21 Innovative
[OP]
Banned
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Jul 17, 2008
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These 20% pre-payments every year, do they have to be done in 1 transaction, or can I pre-pay whenever I want in as many transactions I want, up to 20% for that year? Neufeld also mentioned doubling up the monthly payments, can this be done for every month?

Another thing is, how do I calculate how much interest I'm paying. Apparently these mortages are a ripoff since in year 1, for a standard 25 amortization, half of the payment is interest alone, while towards the end, is mostly principle.

When renewing these 5 year terms, or whatever the term, aren't you starting a new cycle where the first year of the new term you again waste half of the payment in interest alone? So isn't someone owning a mortage actually over pays in interest since every new term resets the cycle and you pay half of the value in interest?
Deal Addict
Apr 4, 2013
1274 posts
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As long as you meet the qualification standards, you can select a shorter amortization.

If the pre-payment options do not meet your needs, another option is to select a 1-year term. You can use the maximum pre-payment options available throughout the year and then make a lump sum payment when your mortgage renews.
Deal Fanatic
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Feb 2, 2014
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Toronto
Depends on the lender...some allow one payment per year, while others allow many (up to the 20% annual cap).

You are incorrect about the 2nd part. It doesn't matter if your term resets or not. What matters is the balance and amortization period. It doesn't matter if the term resets, as long as the term and balance continue the same.

A mortgage is a sinking loan with a fixed payment. So yes, you are paying more interest at first, as the balance is high. At the end of the amortization period, the balance is low and most of your mortgage payment goes towards the principal.
Kevin Somnauth, CFA
Principal Broker - First Toronto Mortgage - MA (Ontario #13176, BC #X301007)
Real Estate Salesperson - Century 21 Innovative

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