Mortgage Term vs Mortgage Amortization in Canada
WOWA Trusted and Transparent What You Should Know
- Amortization is the initial plan of when you'll have your mortgage fully paid off.
- The most common amortization time in Canada is 25 years.
- The term is an agreement with your lender about certain mortgage elements.
- You agree to these elements for a term length, which is typically five years.
- Your mortgage term specifies your interest rate, prepayment penalties, fixed vs. variable rate and more.
Amortization is the total time it takes to pay off your mortgage. The most common amortization in Canada is 25 years, although it can be up to 30 years. After making all your mortgage payments for 25 years, you will fully own the home. A longer amortization will decrease your monthly mortgage payments, but you will end up paying more interest over your mortgage.
Within your amortization, there are multiple mortgage terms. The term is an agreement with your mortgage lender about specific mortgage characteristics. The most important characteristic is your mortgage interest rate. However, your term will also specify prepayment penalties, fixed. vs variable rate, and more. You agree to these characteristics for a term length - which is typically five years in Canada. At the end of your term, you must renew your mortgage. This allows you to renegotiate with your lender or switch to another lender altogether.
| Making Longer | Making Shorter | |
|---|---|---|
| Mortgage Amortization |
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| Mortgage Term |
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Mortgage Amortization Period
As mentioned previously, your mortgage amortization is the initial lifetime of your mortgage. It's the length it will take to initially pay off your mortgage and be debt-free from your home. The amortization assumes you make regular mortgage payments and don't remortgage or refinance your property.
The most common amortization is 25 years. This is because it's the maximum allowed by CMHC rules. However, if your down payment exceeds 20%, you can increase your amortization to 30 years. A more extended amortization will reduce your monthly mortgage payments, but you will pay more interest throughout your mortgage. Likewise, shorter amortizations will increase your monthly mortgage payments, and you'll pay less interest. The following table compares interest paid on a $500,000 mortgage at a 3% interest rate, and differing amortizations.
| 20 Year Amortization | 25 Year Amortization | 30 Year Amortization | |
|---|---|---|---|
| Monthly Mortgage Payment | $2,773 | $2,371 | $2,108 |
| Lifetime Interest Paid | $165,517 | $211,317 | $258,887 |
Amortization Schedule
An amortization schedule is a table that outlines how you will pay off your mortgage over the lifetime of your mortgage. The table includes the balance of your mortgage, the interest rate, and the principal amount. It will also show how much of your payment goes towards the interest and the principal. In the first few years of mortgage payments, much of your contributions pay off interest instead of the principal. However, after many years, more of your payments will be directed to the balance.
Your amortization schedule can be helpful in understanding how much home equity you have. It's essential to remember that an amortization schedule is just a prediction. If interest rates rise or your payments are late, the schedule will change. Below is an example of an amortization schedule taken from our amortization calculator page. It shows the table for a $500,000, 25-year mortgage, with monthly payments at a 3% interest rate.
| End of: | Principal Paid | Interest Paid | Ending Balance |
|---|---|---|---|
| Year 1 | $13,639 | $14,813 | $486,361 |
| Year 5 | $72,473 | $69,791 | $427,527 |
| Year 10 | $156,658 | $127,869 | $343,342 |
| Year 15 | $254,449 | $172,341 | $245,551 |
| Year 20 | $368,045 | $201,008 | $131,955 |
| Year 25 | $500,000 | $211,317 | $0.00 |
Extending Your Amortization After a Few Years
If you are already multiple years into the amortization period, you can extend the length through a mortgage refinance. This will increase the amount you owe your lender, but your monthly mortgage payments will decrease—additionally, the amount of interest you pay over your mortgage increases. If you decide to reduce your mortgage payments through a refinance, do it when your term is over. This will help you avoid expensive mortgage-breaking penalties.
Maturity Date
The maturity date is the last day of your mortgage amortization. It's when your mortgage is fully paid, and you own your home outright. If you don't refinance your mortgage at the end of your term, you will have to pay the lender the remaining balance owed.
More About Mortgage Terms
You are not expected to pay off your mortgage when your term ends fully. The term is just a chapter over the course of your entire mortgage life, otherwise known as amortization. When you negotiate your mortgage term with your banker, you have the option to choose between characteristics such as:
- Fixed vs. Variable Rate
- Open vs. Closed Payments
- Term Length
- Interest Rate
It's essential to choose the proper mortgage term characteristics because you don't want to have to renew your mortgage before you're ready. There are penalties for breaking your mortgage before the term is over. If you want to end your term early, you can use a mortgage penalty calculator to see if the costs are worth it.
Mortgage Term Tactics
When remortgaging, you can choose a fixed or variable rate mortgage. A variable rate means your mortgage rate will change throughout the mortgage term, while a fixed rate will remain the same. If you expect the Canadian prime rate to increase, you should select a fixed-rate term to lock in your rate before it increases.
If you expect mortgage rates to continue rising, you should choose a fixed rate for a longer term. For example, a ten-year fixed-rate mortgage will allow you to lock in today's low interest rates for the next decade. If you choose a variable rate mortgage and the interest rates change, it will affect how quickly you pay off your mortgage. Your monthly mortgage payments stay the same, so increased rates mean less of your payment is contributing to the mortgage balance. As a result, you will owe more money on the amortization maturity date.
The Bottom Line
Overall, amortization is the total length of your mortgage, whereas a term is a mid-term agreement of your mortgage characteristics. You'll have multiple terms within your mortgage amortization. Longer amortizations decrease your monthly mortgage payments but increase the amount of lifetime interest you pay. The most common amortization is 25 years, but you can increase this to 30 years if your down payment exceeds 20%.