If you don’t already have a mortgage amortization schedule - get one!
Maroney on Money for September 5, 1999
Mention the phrase “mortgage amortization schedule” and some people will break out in a cold sweat. The phrase conjures up images of pages and pages, numbers row upon row, produced by complex calculations that only a computer could comprehend.
Maybe it’s a fear of numbers or, perhaps, a simple oversight but whatever the reason, in my experience, it is a rare borrower who actually owns a mortgage amortization schedule. I find this quite baffling.
With run-of-the-mill type purchases, buyers usually wait around for a receipt from the vendor. Go to the grocery store or any department store and, no matter how small your purchase, you can bet that the cashier will hand you a receipt. Consumers peruse these receipts like hawks to make sure they were charged the correct amount.
So why then do so few home-buyers bother to get an amortization schedule when mortgaging their property? Granted, an amortization schedule is not technically a receipt, but like a receipt, it does tell the buyer how much their purchase cost – it also provides information that can be used to help borrowers minimize their interest cost and effectively manage their debt repayment
While presentation may differ, most amortization schedules show the same basic information: loan payment number, date of payment, payment amount, principal and interest portion of each payment and the balance of the loan outstanding.
Unfortunately, lenders don’t typically provide borrowers with a mortgage amortization schedule as a matter of course. But they will print one out if you ask and, in many cases, open your wallet. Imagine that – paying someone to tell you how much your purchase is going to cost – what gall!
But if you have a modicum of computer know-how you can buy software that will produce amortization schedules. Be careful here though – many of the software packages available are designed for American mortgages which can be very different from their Canadian counterparts. For example, most Canadian mortgages calculate interest semi-annually whereas American mortgages are calculated monthly. American mortgages are also payable at the start of the payment period (i.e., “in advance”) while Canadian mortgages are payable at the end of the payment period (i.e., “not in advance”).
To show how useful a mortgage amortization schedule can be, I printed off a schedule assuming a $100,000 mortgage at an annual interest rate of 7.8% amortized over 25 years. The resulting payment is $750.49 per month. Space limitations prohibit displaying the schedule so you’ll have to trust that I have my numbers right.
The first thing my sample amortization schedule shows me is that a 25-year amortization period produces some downright ugly numbers. For example, at the end of the first five-year period the total mortgage payments will amount to $45,029.4 ($750.49 for 60 months). These payments will have reduced the loan principal by only $8,073.43 with the difference of $36,955.97 having gone strictly to pay interest owing on the debt – yikes!
What my schedule is really showing me is that it doesn’t take a whole lot to knock off the first five years of a mortgage amortized over 25 years. If I redo my schedule using a 20-year amortization period, I find that my monthly payment would be $816.40. In other words, by increasing my monthly payment by a mere $65.91, I can save $36,955.97 of interest payments and be debt free five years earlier. That’s not a bad return for slightly more than $2 a day.
The lesson here is that a mortgage amortized over 25 years is extremely expensive and should be avoided if at all possible. Many of us know this intuitively but a mortgage amortization schedule can show this in black and white. It’s one of those things that you really have to see to believe.
A mortgage amortization schedule can also readily show the benefit from making a pre-payment on your mortgage at any point in time. Looking at the principal column of my schedule, I can easily see that if I decide to make one extra monthly payment at the end of year one, I’ll need to pay only $119.62 (not my regular monthly payment of $750.49) to reduce my amortization period by one month. The interest column tells me that by making this extra payment I’ll save $630.87 of interest – a good deal I say!
Prepaying according to your mortgage amortization schedule avoids the need to redo the schedule every time a prepayment is made thereby ensuring its continued usefulness. If, as is often the case, prepayments are made without regard to the amortization schedule you’ll find yourself continually reprinting the schedule.
To paraphrase Woody in the movie Toy Story: “if you don’t already have a mortgage amortization schedule – get one!”
Jim Maroney is a chartered accountant with Andrews Brown Maroney in Maple Ridge.
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