How Long Should I Amortize My Mortgage For?

Written by Lisa Rennie
Fact-checked by Caitlin Wood

How Long Should I Amortize My Mortgage For?

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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.

What are the differences between renting and buying a home? Find out here.

Different amortization periods will change the amount that your monthly mortgage payments will be. 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 for?

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.

In Canada, the most common amortization period for a mortgage is 25 years with a five-year fixed term. 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.

Click here for some information about mortgage terms and amortization periods.

Should You Choose a Shorter or Longer Amortization Period?

Although 25 years is the most common amortization period chosen by borrowers, there are longer and shorter time frames to choose from. The one you decide will depend on a number of factors.

Become Debt Free Sooner

Shorter amortization periods are obviously appealing because they allow borrowers to pay off their mortgages sooner rather than later. They’re also attractive because the overall amount of interest paid is much less than with longer amortization periods. The longer the payment period, the more interest you’ll have to pay, and vice versa.

Look at this to know if the interest on your mortgage is tax deductible in Canada.

Larger Monthly Payments

But shorter amortization periods also mean that your monthly payments will be higher. If you’re able to make bigger payments comfortably, a shorter amortization period might be best. But if you struggle to make a certain amount of money each month, you may be better of with a longer amortization, which comes with lower monthly payment amounts.

Consider Your Employment Type

Short amortization periods may also prove to be difficult for those who are self-employed or have an irregular income as a result of commission-based employment. They may also be tough for those who are buying a rather expensive home which would require a huge loan amount. In these cases, a short amortization period could tie up cash flow and might not be ideal.

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Monthly Payment Cost

The majority of Canadians usually go with a longer amortization period for the simple fact that their monthly mortgage payments will be lower. For many, the ability to afford a home purchase depends squarely on their ability to make their monthly payments. However, it should be noted that longer amortization periods mean the mortgage will take longer to pay off, and the overall interest amount paid will be much higher.

Want to know how much it costs to buy a house in Canada’s major cities? Check out this infographic.

What Other Factors Should Borrowers Consider For Their Mortgage?

While the amortization period is definitely an important factor to consider when applying for a home loan, there are several others that should also be taken into consideration, including the following:

Interest rate. Obviously, a higher interest rate makes a mortgage more expensive. And higher 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. The rate you are offered will depend on a number of things, including:

The posted rate – lenders have some leeway in terms of the interest rate they charge, but not by much. They usually must be within range of what the posted interest rate is as set by the Bank of Canada.
The rate your lender is willing to offer you – lenders may be willing to negotiate an interest rate with you, but you’ll usually have to have stellar credit in order for that to happen, which brings us to our next point.
Your credit score – generally speaking, the higher your credit score, the lower the interest rate you’ll be offered.
Variable vs. fixed rate – variable interest rates are usually lower than fixed rates. But these rates can easily fluctuate in either direction and be riskier because of such volatility. The type of rate that you choose should be based on the climate of the market and whether or not rates are expected to rise or fall any time soon.

Payment frequency. Typically mortgages are repaid in monthly installments. However, there are also options to pay bi-monthly, bi-weekly, and sometimes even weekly.

Want to learn more about the different mortgage payment options? Read this.

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.

If mortgage rates increase while you’re buying a house, here’s what you can do.

Mortgage Insurance Plays a Role

Conventional mortgages require a minimum down payment of 5%, but if you are able to put down at least 20%, you’ll have more freedom in terms of how long your amortization can be. Mortgage loans with less than a 20% down payment are considered to be high-ratio home loans and must, therefore, be insured by mortgage default insurance, most commonly referred to as CMHC insurance. The insurance premium that you are responsible for paying protects your lender in the event that you default on the mortgage payments.

Save money and learn how to avoid CMHC insurance fees.

As a result of the added risk high-ratio mortgages, lenders and mortgage default insurance companies want to make sure that you are able to afford to pay back the entire loan amount within a specific time period.

As of 2012, the maximum amortization period on all homes with CMHC-insured mortgages has been reduced from 30 to 25 years. However, if you are able to come up with at least 20% down on your home purchase, your lender may be willing to accept a longer amortization period.

Looking to borrow money for your down payment? Here’s how you can do it.

Credit Score Required to Get Approved For a Mortgage in Canada

Lenders will require that borrowers have a specific minimum credit score in order to extend a mortgage. Credit scores reflect a borrower’s financial past and habits. High scores are usually associated with borrowers who have made their past loan payments on time and in full, while low credit scores are typically reflective of a past of missed or late payments.

Trying to rebuild your credit after a late payment? Try reading this.

Low credit score borrowers are more of a risk to lenders, so they’re less likely to deal with these types of borrowers for this specific reason. If they do choose to work with low credit borrowers, lenders will usually insist on charging a higher interest rate to offset their risk.

Borrowers with a higher credit score will not only be more likely to get approved for a mortgage, they’ll also be able to secure a lower interest rate, making their mortgage more affordable.

In Canada, most conventional lenders require a minimum credit score of 680 from their borrowers. Anything less than that dramatically reduces the chance of mortgage approval. Anything under 600 will almost certainly result in a denied mortgage application from conventional lenders. In this case, low credit borrowers may have to seek out alternative lenders who deal specifically with borrowers with bad credit.

Read this to learn how you can improve or fix your credit score this year.

Final Thoughts

There are plenty of things to think about when applying for a mortgage. Loans Canada can help connect you with a mortgage lender that can offers terms that best suit your specific situation.

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Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.