Mortgage Term vs Mortgage Amortization in Canada
What You Should Know
- Amortization is how long it will take for your mortgage to be fully paid off.
- The most common amortization period in Canada is 25 years.
- The term is a mortgage contract with your lender about certain mortgage elements, such as your rate and payment schedule.
- You agree to this contract for a specific term length, with the most common term length being five years.
When getting a mortgage, you’ll need to choose both an amortization period and a term length. You might notice that there are different rates and payment amounts with each option, but what’s the difference between a mortgage term vs. amortization?
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 30 years or even longer. Based on an amortization schedule, after making all your mortgage payments for your amortization period, you will fully own the home. A longer amortization will decrease your monthly mortgage payments, but you will end up paying more interest over the life of 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, if your mortgage hasn’t been fully paid off yet, you must renew your mortgage. This allows you to renegotiate with your lender or switch to another lender altogether.
Changing Amortization and Term Lengths
| Making Longer | Making Shorter | |
|---|---|---|
| Mortgage Amortization |
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| Mortgage Term |
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Mortgage Amortization Period
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.
Your amortization can change, such as if your principal payments change. If you make a mortgage prepayment, you’ll be shortening your mortgage amortization as you are paying off your mortgage faster. If you have a variable-rate mortgage with a variable payment and your interest rate goes up, then you’ll be lengthening your mortgage amortization as it will take longer to pay off your mortgage. If you fall behind, your mortgage payments for your next term might be higher so that you can catch-up to your original amortization period.
The most common amortization is 25 years. This is because it's the maximum allowed by CMHC rules for insured mortgages. However, if your down payment exceeds 20%, you can increase your amortization to 30 years or even longer. 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, a large portion of your mortgage payment is used to pay off interest instead of the principal. However, after many years, more of your payments will be directed to the principal 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 mortgage maturity date is the last day of your mortgage term. It's when your current mortgage contract will end. If you don't renew or refinance your mortgage at the end of your term, you will have to pay the lender the remaining balance owed. Often, lenders will allow you to renew your mortgage months in advance of the maturity date.
Mortgage Term
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 have a closed mortgage. 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. For example, if you expect Canadian interest rates to increase, you should select a fixed-rate term to lock in your rate before it increases.
The Bottom Line
Overall, amortization is the total length of your mortgage, whereas a term is a mid-amortization 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 if your down payment exceeds 20%.