More than a profitable word at Scrabble
Aside from being a profitable word in Scrabble, amortization is a rather misunderstood concept.
Indeed, very (too?) often, mortgage brokers hear their clients say that they want a 15-years loan because they want to have paid off their house in 15 years. We seem to be confusing the duration of the loan and the amortization of the loan.
Eh? It's not the same thing?
No! Amortization or amortization period is the length of time expected to fully repay a loan. This is the scheduled payment schedule in a simplified way.
So why isn’t the amortization the time it takes to pay off the house if it’s said to be the expected interest repayment period? It gets confusing, right?
Amortization time changes over time
And yes, several different strategies can be used during the life of a loan. Sometimes, at renewal, the amortization will go up to reduce the payments, or a lump sum capital payment will reduce the effective amortization.
Here is a very simple example:
Karine and Claude buy a house in 2018 with a 5% down payment. With their insurance premium, the loan therefore has a % of 98.8%. Debt weighs 98.8% of the value of the house. All with a 25-year amortization.
In 2023, Karine and Claude decide to refinance the house to do some work. They refinance at 80%, with a 30-year amortization.
Did they just lose 10 years? Or has the debt instead fallen by 18.8%? Not to mention the cash obtained or the change in payments!
Always keep the beat in mind
Basically, amortization is the rate of repayment of a loan. And the pace can vary depending on each person’s life circumstances. We must stop seeing the repayment of a mortgage loan in a number of years, but rather see it in % paid for an asset whose value is constantly increasing.
Talk to your mortgage partner, you will be able to understand many things about your mortgage loan!