Your mortgage amortization period is the total length of time over which your entire mortgage will be completely repaid. It might be helpful to compare this with your mortgageterm, which is the length of time you have a mortgage agreement with your current lender.
Typical Canadian mortgages are 5-year terms with 25-year amortizations.
Your mortgage term is usually from between 6 months to 10 years, depending on your lender and your financial situation. During this term, you receive the same rate. When your mortgage term is up, you will renew your mortgage either with your current lender, or with a new lender.
Mortgage amortization periods affect your monthly mortgage payments. Longer amortization periods mean you have lower monthly payments, but because you are repaying the loan over a longer period, you will pay more in interest rates by the time your mortgage is paid off.
All Canadians must insure their mortgages with CMHC if their down payment is 20 per cent or less. If you do not have to insure your mortgage with CMHC, you may be able to arrange an amortization period of 35 and even 40 years. However, most mortgages must be CMHC-insured, and the maximum amortization period is 25 years.
Short or long term amortization: the pros and cons
Which is best, a short or long amortization period? It depends on your current financial situation. For example, choosing a long amortization period which means your monthly payments are lower could make the difference between being able to afford a home, or not.
However, you will pay more interest over the life of your mortgage, which could prevent you saving for your retirement.
The following example shows the difference between a 25 year and 30 year amortization period, for a mortgage amount of $300,000 and an interest rate of 5.1%:
Monthly payments for the shorter amortization will be $142 more than the monthly payments for the longer period. However, homeowners with the longer period will pay over $100,000 more in interest payments over the life of the mortgage.
Reducing interest costs
Increasing the frequency of your mortgage payments will also help reduce the total amount you pay in interest. Could you make biweekly payments? What about doing prepayments?
A mortgage is one of the largest commitments you will ever make. Take time to find out which one works for you before signing on the dotted line.