The mortgage amortization period is how long it will take you to pay off your mortgage. This is in contrast to the mortgage term, which is the length of time that your mortgage agreement and current mortgage interest rate is valid for. Once your mortgage term expires, you will either renew with the same mortgage lender, switch mortgage lenders, or refinance. The most common mortgage term in Canada is five years, while the most common amortization period is 25 years. Changing your amortization period and your payment frequency can have a large impact on the lifetime cost of your mortgage.
Total Interest Payment
A mortgage amortization schedule shows the amount of each mortgage payment, and how much of that payment will go towards the principal and the interest portions. As you pay off your mortgage, the principal that goes towards your mortgage principal will go up, while the interest portion will go down.
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The amortization period is based on a set number of regular and constant mortgage payments. If the frequency or amount of your mortgage payments changes, then your amortization period will also change.
If you make more frequent mortgage payments, such as by changing from a monthly payment to an accelerated bi-weekly payment, then your amortization period will decrease. This means that you will be paying off your mortgage faster while also saving in interest costs. Taking advantage of particular prepayment privileges that some mortgage lenders offer, such as RBC’s Double-Up prepayment option or BMO’s 20% annual lump-sum prepayment option, will also reduce your amortization period.
Most banks offer some form of mortgage payment deferral to help homeowners during difficult financial periods. TD, for example, allows you to skip the equivalent of one monthly mortgage payment once per year. These skip-a-payment options don’t mean that you’re off the hook for the payment amount. The interest of the skipped payment will be added to your mortgage principal, lengthening your amortization period and resulting in more interest paid in the long-run.
The mortgage amortization period that you choose will affect the amount of your mortgage payments and the overall interest paid on your mortgage. Longer amortization periods will spread out the length of your mortgage. This means that each mortgage payment will be relatively smaller, which can help make payments more affordable for cash-strapped homeowners. However, this will result in more interest being paid overall.
It is best to choose as short of an amortization period that you can comfortably afford to pay. While this does mean that each payment will be larger, you will be able to pay off your mortgage faster and save potentially thousands in interest costs. You can check your budget using a mortgage affordability calculator.
Some mortgage lenders offer 35-year and even 40-year amortization periods. While there is no set limit on the maximum mortgage amortization period for uninsured mortgages, the maximum for insured mortgages is 25 years. You will require mortgage insurance if you make a mortgage down payment of less than 20%.
You can change your amortization period by refinancing once your mortgage term expires. When refinancing you might want to extend your amortization period to make your mortgage payments more affordable. If you now have more income, you might want to consider shortening your amortization period and paying larger mortgage payments. Refinancing your mortgage comes with additional paperwork, fees, and a mortgage stress test depending on your mortgage lender. For example, you can skip the mortgage stress test by refinancing with a private mortgage lender.
Your amortization period will also be affected by any actions you take during your mortgage term, such as changes to your payment frequency or changes to your payment amount, including additional prepayments or skipping a mortgage payment.
Some mortgage lenders offer mortgages with a negative amortization period, also known as reverse mortgages. This means that the amount that you owe on your mortgage will grow even as you make mortgage payments. Reverse mortgages are often used to unlock equity in your house that you can then use in retirement. Compared to a home equity line of credit(HELOC), you do not have to make any payments at all. Instead, interest is added to your mortgage balance. In Canada, you must be at least 55 years old to be eligible for a reverse mortgage.