Do you know the difference between your mortgage term and your amortization period?

A common source of confusion for prospective homebuyers is the difference between a mortgage term and amortization period. A typical Canadian mortgage rate has a 5-year term with a 25-year amortization period.

Mortgage Term

The mortgage term is the length of time you commit to a low mortgage rate, lender, and associated best mortgage rate terms and conditions. 

Mortgage Amortization Period

This is the length of time it will take you to pay off your entire mortgage. Longer amortization periods reduce your monthly payments, as you are paying your mortgage off over a greater number of years. However, you will pay more interest over the life of the mortgage.

Maximum Amortization Reduced to 30 years on March 18th, 2011

In January 2011, Minister Flaherty announced that the maximum amortization period on all CMHC insured homes would be reduced from 35 to 30 years.

Many home buyers choose shorter amortization periods resulting in higher monthly payments if they can afford to do so, knowing that it promotes positive saving behaviour and reduces the total interest payable.

Short vs. Long Term Amortization Periods

Prepayment privileges set out by your lender will determine whether you can shorten your amortization period, by either increasing your regular monthly payments and/or putting lump sum payments towards the principal. However, beyond these privileges, you will often incur penalties for making additional payments. According to the Canadian Association of Mortgage Professionals, 24% of Canadians took advantage of prepayment options in 2009.