If owning a home is your dream then the current climate of subdued housing values is an ideal one to fulfill this dream. But you should remember that however low the price of your dream home is at present, buying it still requires a substantial investment. For those who have just started out in their career, taking a huge loan and making large monthly repayments may not be affordable. A growing equity mortgage is a good option for such people.

A growing equity mortgage comes with smaller initial payments that progressively increase as the years go by. You get to make smaller payments during the first few years of the loan term. As you progress in your career and your earnings increase, you can meet the increasing monthly repayment amounts.

Growing Mortgage vs. Graduated Mortgage

A growing mortgage is often confused with a graduated mortgage. The latter has some similarities such as fixed interest rates as well as gradually increasing repayment amounts. However, the first repayments that you make on a graduated mortgage are much smaller than what you would require to pay to even cover the interest payment fully. Hence, the graduated mortgage has negative amortization, causing your total dues to increase over the years. A growing equity mortgage does not have negative amortization and you can reduce the total interest paid on the loan, thus making the loan cheaper and easier to pay off quickly.

Advantages of GEM

A GEM’s greatest advantage is that you can make smaller repayments initially and larger ones as time passes and your capacity to pay increases. This makes home purchase possible for people who do not have much savings but have the potential to earn well in future.

Another advantage is that you cut down on interest paid by means of making payments towards your loan principal with each installment. As the principal due falls steadily so does the interest payable.

Disadvantages of GEM

The singe greatest disadvantage of a growing equity mortgage is that you need to keep making bigger and bigger repayments as the years go by. It is impossible to predict with certainty that your earning capacity and actual salary will increase in the future years. A recession may cause a drop in your salary levels. In worst case, you may even lose your job. In such a scenario, a GEM can become an enormous burden. Not only do you have to keep making repayments, but the repayments keep growing bigger and bigger.

A GEM is an option you can go for if you are sure that your earnings will increase in the future. This expected increase must be adequate to cover the growing repayments you will require to make. This aspect makes it essential for you to take a cautious approach when calculating the amount of GEM you want to avail of.

Remember that cost of living and inflation are also important factors that impact the actual repayments that you can afford to make. As years go by, costs increase and more of your income is used towards fulfilling daily needs and critical expenses. Factor this into your calculations when you determine the amount of growing equity mortgage that you can comfortably repay.

Author Bio: For more information on a equity mortgage in Toronto or a mortgage in Canada contact a mortgage broker at Canadian Mortgages Inc.

Category: Finances
Keywords: home equity, equity mortgage, mortgage, finance, credit, finance, growing equity mortgage,