How Does A Mortgage Amortization Period Work
Mortgage Term Vs. Amortization
Both, mortgage term and amortization are associated with the payment process in regards to your loan. Like with other important mortgage terms, it is important to know the difference between “term” and “amortization” so you can better understand the mortgage process.
A mortgage term is the time in which you accept the terms and conditions, as well the mortgage interest rates, of your chosen mortgage product or customized loan. The term can range from 6 months to 10 years, at the end of which you and the lender will re-negotiate your mortgage terms.
The mortgage amortization period is different. Amortization is the time frame in which you have to pay off the loan in full, which generally ranges from 5 to 25 years in length.
A mortgage amortization calculator can let you “test” a variety of scenarios, providing you with a payment schedule for each. The shorter your amortization period, the higher your payments will be, but the sooner you will be mortgage-free. Brokers For Life recommends opting for the shortest amortization period you can afford.
Mortgage Amortization 101
The mortgage amortization period is the time frame in which you have to fully pay off your mortgage loan. The amortization period can range anywhere from 6 months to 30 years, with the latter being the standard amortization period (and requiring a minimum down payment of 20%).
Selecting the length of your amortization period is a very important decision which will determine the total amount of interest you will pay over the course of your mortgage.
Your down payment will play a large role on the number of options you will have — with a larger down payment allowing for longer amortization periods up to 35 years.
A shorter amortization period can save you thousands in interest costs over the life of your mortgage. Your mortgage payments will be higher if you have a shorter amortization period, but with more of your payment going towards your principal balance, you will build equity in your home faster and become mortgage free sooner.
A longer amortization period allows for lower mortgage payments, but you will be paying more interest over the life of your mortgage, and build equity in your home slower than with a short amortization period. A shorter amortization period could mean a savings of thousands of dollars.
UPDATE — New Amortization Rules In Canada
Historically, in Canada, the maximum mortgage amortization period has been 30 years. This gives those with custom loans or a traditional mortgage 30 years in which to pay off an entire home mortgage loan.
However, for those mortgages insured by CMHC, the rules are changing, and the maximum amortization period is now changing to 25 years. The upside to these new rules is that since mortgages are paid off earlier, homeowners can build up equity sooner and become mortgage-free more quickly.
However, since CMHC insurance is only required for mortgages with a down payment of 20% or less, it is possible to secure a longer amortization period than 25 years if you are willing to put a down payment larger than 20% on your purchase.