TNG Explains: Amortization and your mortgage – what you should know
Mortgage costs depend on the term and amortization period, impacting interest rates and payments.
Statistically, you’ll likely have a mortgage at some point in your life. More than one-third (35.5%) of Canadians hold a mortgage. Mortgage is not only the most common but also the most significant kind of debt held by Canadians.
The amount of your mortgage will depend on a few factors; the amount of your down payment, whether you opt for a variable, fixed, or hybrid interest rate, and how often you plan to pay – weekly, biweekly, or monthly. But the most significant impact on how much you’ll ultimately wind up paying for your home depends on your amortization period. Your mortgage amortization is different from your mortgage term, though both greatly impact your payments. Combined, your mortgage term and amortization period will affect your overall costs, interest rates, and regular payment amounts. So, what’s the difference between a mortgage term and an amortization period?
Mortgage term
The mortgage term is the length of your current mortgage contract with your lender. Mortgage terms, which includes everything your contract outlines including the interest rate, can range anywhere from a few months to five years or longer. At the end of each term, you’ll be required to renew your mortgage term either with your current lender or a new one. You’ll need to renew your
mortgage term several times over the lifetime of your mortgage, ending once you no longer owe money on the mortgage.
Amortization
The amortization period is the time you’ll take to pay off your mortgage in full. Total amortization is an estimate based on the interest rate of your current mortgage term. While the length of an amortization period can vary based on the mortgage term and interest rate, the longest being 25 years,
if your down payment is less than 20% of the price of your home and therefore insured by the Canadian Mortgage and Housing Corporation (CMHC). Otherwise, amortization periods can last 35 to 40 years, depending on your lender.
This graphic from the Financial Consumer Agency of Canada breaks down an example of a $300,000 mortgage with a 5-year term and an amortization of 25 years. The most typical mortgage in Canada has a 5-year mortgage term with a 25-year amortization period.
How do your mortgage and amortization terms affect your costs?
Remember that your mortgage term sets the interest rate and interest type (fixed, variable, Hybrid or combination mortgages) and how long you will be paying that rate. Your payments will be higher or lower depending on your interest rate and whether you opt for a fixed or variable rate. With your amortization period, the longer the term, the lower your regular payments will be. However, the longer your amortization period, the more overall interest you will pay over the lifetime of your mortgage.
