When you first delve into the world of real estate, many words can cause confusion. The words ‘term’ and ‘amortization’ are a couple examples that may cause you some confusion. They are sort of similar, yet totally different, so it’s a good idea to learn the differences.

Mortgage Term

The mortgage term you hear about so often, refers to the length of time you’re committed to a specific mortgage rate, the lender and various conditions. The average mortgage term in Canada is five years, but you can also choose different lengths of time in many cases.

When you think about a mortgage term, consider it like a “reset” button of sorts for your mortgage. When the term is up, you get to renew the mortgage on the amount that’s left. When you sign on for a new term, it’s generally at the current mortgage rate, so that may be good news or bad news, depending on what the interest rate was when you started the first term.

Mortgage Amortization

The mortgage amortization refers to the period of time it will take you pay off the full amount of the mortgage, starting at the beginning when you first buy the house. The longer the amortization period, the less you’ll pay in monthly mortgage payments, but you’ll pay more in interest over that time.

On July 9th of 2012, Canadian Finance Minister Jim Flaherty announced the maximum amortization period in Canada was reduced from 30 years to 25 years. This pertains to homes that are CMHC insured and have a down payment of 20% or less. Down payments greater than 20% may still qualify for the higher amortization periods.

Depending on your budget and your preferences when it comes to paying interest, you may lean toward a longer amortization or a shorter one. If you can afford to make higher payments or bi-weekly payments, a shorter amortization will results in thousands of dollars of interest savings.

All About the Interest

In the end, it is the interest that makes the difference and makes you have to pay more than you want. Both the term and the amortization of your mortgage cause interest rates to come into play, so make sure you take the time to calculate the different possibilities before making a decision.

Lay out the different scenarios before choosing and see which one fits into your lifestyle more comfortably. Paying more is never the goal, but if longer terms and longer amortization is the only way you can get your family into a house, they may be sacrifices worth making.