You’re finally ready to buy a home. Congrats! But in order to make that dream a reality, you’ll have to take out a mortgage first. And when it comes to mortgages, there are plenty of factors to consider, including the amortization period.
The amortization period you choose will impact your mortgage payments. Shorter amortization periods are typically associated with higher payment amounts, while the opposite is true for longer periods.
The question is, how long should you amortize your mortgage?
Key Points
- Your amortization period represents the overall length of your mortgage or the amount of time to fully repay your loan.
- A longer amortization comes with lower monthly payments, but more interest paid over the amortization period.
- A shorter amortization comes with higher mortgage payments, but less interest paid overall.
- You can shorten or lengthen your amortization by refinancing your mortgage.
What Is An Amortization Period?
An amortization period is the amount of time that you will be given to fully repay your mortgage. This time period will depend on the size of your down payment and the length of time that you are eligible to choose.
Is Your Amortization Period The Same As The Mortgage Term?
It’s important to distinguish between a mortgage’s “amortization” and “term”. While it’s common to assume the two terms are referring to the same thing, they’re actually different.
- An amortization period refers to the overall length of the mortgage or the total amount of time it takes you to repay the entire cost of the home.
- A mortgage term, on the other hand, refers to the time period that your mortgage contract is in effect. Your loan contract will detail the term length, interest rate, and payment amounts. You can renew your term several times throughout the amortization period.
What Is The Average Amortization Period In Canada?
In Canada, the most common amortization period for a mortgage is 25 years. Having said that, not everyone necessarily chooses this amortization period. Several factors come into play when a borrower decides on a specific time frame within which to fully repay their mortgage.
How Long Can You Amortize Your Mortgage In Canada?
In Canada, amortization period options range quite a bit. While the average amortization period is 25 years, you could choose a much longer amortization, depending on the lender. You may even opt for a very short amortization period if you want to pay off your debt sooner, as there is technically no minimum.
What Is The Maximum Amortization Period In Canada?
If your down payment is less than 20% of the purchase price, the longest amortization period you can take out is 30 years, but only under certain conditions. In other words, insured mortgages (with down payments less than 20%) cannot be amortized for longer than 30 years.
Currently, only first-time buyers who purchase newly built homes can use a 30-year amortization if they have a down payment less than 20%. But effective December 15, 2024, 30-year amortizations will be available to first-time homebuyers or those who are buying a newly constructed home.
Uninsured mortgages — which are those with at least a 20% down payment — can be amortized for 30 years. You may even amortize your mortgage for longer, depending on the lender. That said, you may need to apply for a mortgage with an alternative lender to extend your amortization period past 40 years.
| Note There is an exception to the maximum amortization period for an insured mortgage. The federal government recently announced that as of December 15, 2024, 30-year amortization periods will be available on insured mortgages for first-time homebuyers or those buying newly built homes. |
Is There A Minimum Amortization Period In Canada?
There is no minimum amortization period in Canada. If you wanted to (and had the financial means to do so), you could technically amortize your mortgage for one year.
What If I Need An Amortization Longer Than 30 Years?
Prime lenders, like banks and federally regulated credit unions, generally don’t allow amortizations longer than 30 years for mortgages. If you want an amortization period longer than that, you’ll need to look to private or subprime lenders.
These lenders have more lax lending criteria compared to traditional lenders. As such, they can use their discretion when it comes to the length of amortizations on mortgages they provide.
How Long Should You Amortize Your Mortgage?
There are perks and drawbacks to both short and long amortization lengths to consider before choosing which one to sign up for.
Why You Should Choose A Short Amortization Period
Here are some reasons why you may want to opt for a shorter amortization period:
Less Interest Paid
You’ll pay considerably less interest with a shorter amortization over the life of the loan, which is another reason why some borrowers choose this option.
Potentially Lower Interest Rate Offered
Lenders also typically offer lower interest rates on shorter amortization periods. As such, you’d be saving a lot of money in interest, both because of a lower rate charged and less time spent paying interest over the life of the loan.
You’ll typically get a lender’s best mortgage rate when going with an amortization of 25 years or less. Anything less than 25 years, however, won’t result in a better mortgage rate. You’ll pay a premium if your amortization is longer than 25 years (ie. up to 30 years).
Pay Off Your Mortgage Sooner
A shorter amortization period means you’ll need to fully repay your mortgage sooner. While that could be difficult given the higher mortgage payments, you’ll be able to pay off your mortgage earlier, freeing up money to spend elsewhere.
Why You Should Choose A Long Amortization Period
While short amortizations have their upsides, long amortization periods also come with a couple of perks:
Lower Monthly Payments
Stretching your mortgage out over a longer period of time means your mortgage payments will be smaller. Many home buyers like the idea of smaller loan payments because it makes mortgages more affordable and easier to budget, despite their higher overall interest payments.
More Expensive Homes Are Within Reach
If you’ve got your eye on a pricier home, you may be able to afford it if you opt for a longer amortization period. Spreading out your installment payments could make buying a more expensive home possible.
How Amortization Length Affects Payment Amount And Interest Paid
To help you understand how the length of your amortization period impacts your mortgage payments and interest paid overall, let’s illustrate using an example.
The following chart compares mortgage payments and interest paid on a 15-year versus a 25-year amortization, assuming a loan amount of $400,000, an interest rate of 5.0%, and a 5-year fixed-rate term in both scenarios:
| 15-Year Amortization | 25-Year Amortization | |
| Monthly Mortgage Payments | $3,152.50 | $2,326.42 |
| Interest Paid Over Term | $87,075.07 | $93,615.23 |
| Interest Paid Over Amortization | $167,449.14 | $297,925.98 |
As you can see, you’re paying over $800 less per month in mortgage payments on a longer amortization period. However, you’re also paying more than $6,500 in interest over the 5-year term, and over $130,000 more in interest over the life of the loan.
What Is A Mortgage Amortization Schedule?
An amortization schedule details each payment you will make over the life of your mortgage. More specifically, this schedule will show you how much of each payment goes towards interest versus principal.
At the beginning of your amortization schedule, a larger portion of each payment will go toward interest. With each payment you make, a little less will go towards interest, and a little more will go towards the principal.
As such, you’ll pick up speed in terms of paying your principal as time goes on. This is the case with a fixed-rate mortgage.
If you have a variable-rate mortgage with fixed payments, the portion that goes towards your interest versus principal will fluctuate as the interest rate changes. So, you could pay more towards interest one month, then less the next, depending on the current behaviour of interest rates.
Can I Change My Amortization Period After I Take Out My Mortgage?
Yes, you can extend or shorten your amortization period after mortgage initiation. To do this, you’ll need to refinance your mortgage at the time of renewal.
When your mortgage term comes due, you can make changes to your loan through a refinance, including shortening or extending the amortization. If you’re facing a much higher mortgage payment at the time of renewal, a potential solution is to extend the amortization. This will give you more time to repay your mortgage and reduce your mortgage payments.
Alternatively, you can choose to shorten your amortization at renewal if you have the financial resources to make bigger payments and want to get out of debt sooner.
It should be noted that you can choose to refinance your mortgage at any time before your term ends. However, you’ll likely pay hefty early prepayment penalty fees if you do. This is why it’s best to wait until your term ends and you’re up for renewal to make changes.
What Other Factors Should Borrowers Consider For Their Mortgage?
While the amortization period is an important factor to consider when applying for a home loan, there are others that should also be taken into consideration, including the following:
Interest Rate
A higher interest rate makes a mortgage more expensive. And higher rates on bigger loan amounts will make the expense of a mortgage even greater.
Ideally, you’ll want to secure an interest rate that is as low as possible.
Payment Frequency
Typically, mortgages are repaid in monthly installments. However, there are also options to pay bi-monthly, bi-weekly, and sometimes even weekly.
Accelerated mortgage payments may also be available, which will allow you to repay your mortgage faster and therefore save on interest over the life of the loan.
Prepayment Penalties
Many lenders charge a penalty fee if a mortgage is paid off early. It’s in your best interests to find out if your lender charges an early repayment penalty fee, and how much that fee is before taking out a mortgage.
Final Thoughts
There are plenty of things to think about when applying for a mortgage, including the amortization length. While longer amortizations mean lower monthly payments, shorter amortizations mean less interest paid overall and the chance to get out of debt sooner. The amortization you choose will depend on your budget and financial goals.
Amortization FAQs
What is the maximum amortization period in Canada?
What is the average amortization period in Canada?
How can I reduce my mortgage payments?
Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.
