Mortgage Basics

What is the Amortization Period for Mortgages?

What is the Amortization Period for Mortgages?
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  • Alivia Massimillo
| 24 March 2023
Reviewed, 24 March 2023
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    Buying a home is one of the most significant investments that most people will make in their lifetime. However, the process can be overwhelming, especially when you consider the various terms and concepts involved in obtaining a mortgage. 

    Understanding the amortization period for mortgages is crucial as it determines the length of time it takes to pay off the mortgage in full. It’s one of the most critical factors that determine how much you’ll pay over the life of the mortgage. In addition, understanding the difference between the amortization period and the mortgage term can help you make informed decisions when choosing a mortgage product that works best for you.

    We will explain these concepts in detail and provide examples to help you better understand the amortization period and the mortgage term. We will also discuss how these concepts impact the total cost of the mortgage and how they can affect your long-term financial goals.

    Key Takeaways

    • An amortization period is the time it takes for a borrower to pay off their mortgage in full, and the maximum amortization period for a mortgage in Canada is 25 years.
    • An amortization schedule is a table that shows the breakdown of each mortgage payment, including how much of each payment goes toward the principal and how much goes toward interest.
    • It’s important to consider your long-term financial goals when choosing a mortgage term and amortization period that works best for you.

    What is an Amortization Period? 

    An amortization period is the amount of time it takes for a borrower to pay off their mortgage in full. During this period, the borrower makes regular payments that include both principal and interest until the entire loan is paid off. In Canada, the maximum amortization period for a mortgage is 25 years.

    For example, let’s say you take out a $400,000 mortgage with a 25-year amortization period and an interest rate of 3%. Your monthly payment would be $1,896.74, and over the course of 25 years, you would pay a total of $568,021.22, including $168,021.22 in interest.

    It’s important to note that the length of the amortization period can affect the amount of interest you pay over the life of the loan. A longer amortization period means lower monthly payments, but it also means paying more interest over time.

    What’s an Amortization Schedule? 

    An amortization schedule is a table that shows the breakdown of each mortgage payment, including how much of each payment goes toward the principal and how much goes toward interest. This schedule is helpful because it shows borrowers how their mortgage payments are reducing their debt over time.

    Here’s an example of an amortization schedule for a $400,000 mortgage with a 25-year amortization period and an interest rate of 3%:

    Month Payment Principal Interest Balance
    1 $1,896.74 $584.07 $1,312.67 $399,415.93
    2 $1,896.74 $585.49 $1,311.24 $398,830.44
    3 $1,896.74 $586.92 $1,309.82 $398,243.52
    300 $1,896.74 $1,875.59 $21.15 $4,281.04
    301 $1,896.74 $1,885.15 $11.59 $2,395.89
    302 $1,896.74 $1,894.72 $2.02 $500.17

    As you can see from the table, each payment gradually reduces the principal balance and increases the amount of equity you have in your home. By the end of the 25-year amortization period, you will have paid off the entire loan and own your home outright.

    What’s a Mortgage Term vs. an Amortization Period? 

    While the amortization period is the length of time it takes to pay off the mortgage in full, the mortgage term is the length of time that the mortgage agreement is in effect. The mortgage term is typically shorter than the amortization period, and at the end of the term, the borrower may need to renew the mortgage for another term.

    For example, let’s say you take out a 25-year mortgage with a 5-year term. At the end of the 5-year term, you would need to renew the mortgage for another 5-year term or choose a new mortgage product altogether. During the renewal process, you may be able to negotiate a new interest rate or adjust the amortization period based on your current financial situation.

    It’s important to note that the amortization period and the mortgage term can have different interest rates. For example, a borrower may choose a longer amortization period to lower their monthly payments but may choose a shorter mortgage term with a lower interest rate to save money on interest over time.

    In Canada, the most common mortgage terms are 5 years, although terms of 1 to 10 years are available. It’s important to consider your long-term financial goals when choosing a mortgage term and amortization period that works best for you.

    What’s the Difference Between Long vs. Short Amortization Periods? 

    Here are a couple of scenarios that could emerge if, for example, you’re looking to purchase a $650,000 home with a 20% down payment. 

    One scenario has a 25-year amortization period, while the other has a 15-year amortization period.

    25-Year Amortization 15-Year Amortization
    Mortgage Amount $520,000 $520,000
    Interest Rate 2.5% 2.5%
    Monthly Payment $2,326 $3,467
    Total Interest Paid $155,881 $83,138
    Total Cost of Mortgage $675,881 $613,138

    As you can see from the chart, a longer amortization period results in lower monthly payments but a higher total interest paid over the life of the mortgage. In this example, the difference in monthly payments between a 25-year and 15-year amortization period is $1,141, but the total interest paid is $72,743 higher for the 25-year period. 

    On the other hand, a shorter amortization period results in higher monthly payments but a lower total cost of the mortgage. In this example, the total cost of the mortgage is $62,743 less for the 15-year period.

    It’s important to note that the interest rate used in this example is for illustrative purposes only and may vary depending on the lender, borrower’s creditworthiness, and other factors.

    Frequently Asked Questions (FAQ)

    How long should I have my loan amortized?

    Ultimately, the best amortization period for your loan will depend on your individual financial situation and goals. Consider how long you want to make monthly payments, what the interest rate is, and the term of the loan. 

    What is an amortization schedule? 

    An amortization schedule includes information such as the total loan amount, the interest rate, the term of the loan, the monthly payment amount, and the breakdown of each payment between principal and interest. Lenders typically provide borrowers with an amortization schedule when they take out a loan, and borrowers can also create their own amortization schedules using online calculators or spreadsheet software.

    Wrapping It Up 

    Understanding the amortization period for mortgages is crucial when it comes to homeownership in Canada. The amortization period determines the time it takes to pay off the mortgage in full, and the mortgage term determines the length of time the mortgage agreement is in effect. By understanding the difference between these two terms and carefully considering your long-term financial goals, you can make informed decisions when it comes to choosing a mortgage product that works best for you.