Getting into the homeowner’s market is an exciting endeavour. It’s one of the biggest investments Canadians make in their lives. However, before you apply for a mortgage, it’s important to understand which mortgage term and amortization period suits your budget and goals.
Depending on what you choose, it can not only impact your mortgage payments but the total cost of your mortgage. To help you make the best decision and save money where you can, this article will explain the difference between the two.
Mortgage Term vs Amortization: What Is The Difference?
| Mortgage Term | A mortgage term refers to the commitment you have made to a mortgage lender, including the rate, terms, and conditions you have agreed to with this lender. |
| Amortization Period | Mortgage amortization is the time it takes a borrower to pay off their whole mortgage. |
Mortgage Term Features
As mentioned, a mortgage term is not the whole length of time you have to pay off your mortgage, but the length of the agreement you’ve made with a lender. This includes the rate, terms, and conditions.
Once this term ends, your mortgage must be renewed based on the remaining funds you have to pay off. You can choose to renew your mortgage with the same lender or a new lender.
If you have an uninsured mortgage and renew with a new lender, you’ll have to pass the stress test again. Only insured mortgages are exempt from this requirement. You’re also exempt from passing the stress test if you renew with your current lender.
Data shows that 80% of mortgages have terms lasting five years or less, making this the most popular mortgage term sought after. This popularity represents a risk-neutral average and it is well promoted by mortgage lenders.
What Is The Maximum Mortgage Term?
There is no maximum mortgage term in Canada, however, most mortgage terms offered range up to 10 years for fixed-rate mortgages and up to 5 years for variable-rate mortgages.
Borrowers that opt for a long-term mortgage, a mortgage 10 years or longer, may be limited to a fixed interest rate. Those in a long-term mortgage agreement who sell their home within the first 5 years of their term may be required to pay a high penalty.
What Is The Minimum Mortgage Term?
The shortest mortgage term can be as few as 6 months, depending on the lender. Most short-term mortgages range between a few months to 5 years.
Those who choose a short-term mortgage may select a fixed-rate or variable mortgage. This option is beneficial when signing up as they can select a lower rate when they sign up. While short-term mortgage payments are more expensive than long-term mortgages, the interest rate is usually lower in comparison.
Amortization Period Features
A mortgage amortization period is how long it takes to pay off a mortgage completely. The mortgage amortization period is calculated based on the interest rate of your current mortgage plan.
The longer the amortization period, the lower the monthly payments will be. However, the longer you take to pay off your mortgage, the more interest you’ll pay.
What Is The Maximum Amortization Period?
The maximum amortization period ranges from 25 to 30 years.
Mortgages insured by the Canada Mortgage and Housing Corporation (CMHC) have a maximum amortization period of 30 years under certain conditions. Right now, first-time buyers purchasing a newly built home with less than a 20% down payment can opt for 30-year amortizations. But new rules will take effect on December 15, 2024, that will allow first-time homebuyers or those who are buying a newly constructed home to use 30-year amortizations.
Mortgages not insured by the CMHC have a maximum amortization period of 30 years (if the buyers are first-time homeowners purchasing a new construction house).
What Is The Minimum Amortization Period?
Technically, there is no minimum amortization period. It depends heavily on what you can afford. For example, if pay off your mortgage in 5 years, you can have an amortization period of 5 years. If you only need one year, you could amortize your mortgage over 1 year.
How Your Amortization Period Affects Your Mortgage Cost
To show you how your mortgage term and amortization period can affect your mortgage payments and overall cost, we’ll go over two examples.
15 Year Amortization vs. 25 Year Amortization Period
Assuming you have a $500,000 mortgage with a 6.5% interest rate, how much would it cost to amortize your mortgage over 25 years vs.15 years?
Based on the table below, you’d save approximately $225,000 on interest with a 15-year amortization period over a 25-year period. However, your mortgage payments would be approximately $1,000 more each month compared to the 25-year amortization period.
Moreover, the $500,000 mortgage would end up costing you double its price when amortizing it over 25 years.
| Amortization Period 25 years | Amortization Period 15 years | |
| Mortgage Payment | $3,349.12 | $4,331.85 |
| Interest Payments | $504,735.68 | $279,732.54 |
| Total Cost | $1,004,735.68 | $779,732.54 |
What Are Convertible Mortgages?
A convertible-term mortgage is when a short-term mortgage is transitioned into a long-term mortgage. As a result of the mortgage being extended, the interest rate will also be subjected to changes.
Changing your mortgage from short-term to long-term may seem like it can lower your payments but interest costs will increase, which can add up to tens of thousands of dollars.
Bottom Line
Choosing a short-term mortgage is beneficial as it saves money due to lower interest rates. A borrower should note that choosing a short-term mortgage doesn’t need to be a permanent decision, as a convertible mortgage can always allow them to transition into a long-term mortgage. Similarly, keep in mind that the amortization period you choose can also have a big impact on your mortgage payment and overall cost.
