When you take out a mortgage, you’ll want to know exactly how much each mortgage payment will be and how long it will take you to pay off your home loan in full. That information is vital to help you budget appropriately. But you might also be curious about exactly what each mortgage payment is made up of; namely, principal versus interest. That’s where an “amortization schedule” comes into the picture.
But what exactly is an amortization schedule, and what kind of useful information will it give you about every mortgage payment you make?
Key Points You Should Know About A Mortgage Amortization Schedule
| Amortization Period | An amortization period is the length of time it takes to repay your mortgage in full. |
| Amortization Schedule | An amortization schedule details each regular mortgage payment over the life of the loan, including how much of each payment goes towards principal and interest. |
| How Does Your Amortization Period Affect Your Mortgage? | Your amortization period will affect your mortgage payment and the amount of interest you pay. |
What Is A Mortgage Amortization Schedule?
An amortization schedule is a table that details every mortgage payment you will make over the life of your loan, or the amortization period. It’s typically broken down annually and will show the details regarding your mortgage payment, the interest, principal and ending mortgage balance for each year.
Common amortization periods are longer as opposed to shorter because they give borrowers more time to pay off their mortgage and take advantage of lower monthly payments.
Amortization Schedule Vs Amortization Period
- Amortization Period – An amortization period is the length of time it takes to repay your mortgage in full.
- Amortization Schedule – An amortization schedule details each regular mortgage payment over the life of the loan, including how much of each payment goes towards principal and interest.
Where Can You Get An Amortization Schedule For Your Mortgage?
Your amortization schedule is very elaborate and includes details of the interest and principal portions for each payment throughout the entire life of your mortgage. As such, calculating your schedule is complex and requires meticulous mathematical equations.
To simplify things for you, mortgage calculators are readily available online for you to use to quickly calculate your amortization schedule, giving you details about your mortgage payment amount for each billing period and how each payment is configured.
Here are a few online calculators to use:
Mortgage Amortization Calculation
If you’re mathematically inclined, you may try your hand at calculating your amortization schedule yourself without the use of an online calculator. In that case, you would use the following formula:
| M = P x r x [(1 + r)n / (1 + r)n – 1] M = Mortgage payment P = Principal balance r = Periodic interest rate n = Number of payments |
To create your amortization schedule, you’ll need to calculate each billing period’s interest. Then, subtract that figure from the mortgage payment amount to get the principal amount. Then, use this number to determine the balance for the payment period.
Repeat this step for each billing period until you reach the end of the amortization.
What Is Shown On An Amortization Schedule?
Your amortization schedule will tell you how much you will pay in your mortgage over time. More specifically, your amortization schedule will show you the following:
- Interest
- Principal
- Extra payments (if applicable)
- Total amount paid (per year and over the life of the loan)
- Remaining loan balance
Your amortization schedule will show you exactly how much of your total mortgage payments is going toward your principal and how much is going toward interest. During the early years of a mortgage, a larger portion of your mortgage payment will likely go toward your interest. As you continue to make timely payments, the interest portion will steadily decrease, while the portion going toward the principal will increase.
Example Of An Amortization Schedule
For illustration purposes, here is an example of what an amortization schedule could look like based on a $500,000 mortgage, a 5-year fixed term at 6%, and an amortization period of 15 years:
Mortgage payments are estimated at $4,219.28 a month based on the loan details above.
| Year | Total Paid For The Year | Interest | Principal | Ending Balance |
| 1 | $50,631.41 | $29,423.07 | $21,208.34 | $478,791.66 |
| 2 | $50,631.41 | $28,114.99 | $22,516.42 | $456,275.24 |
| 3 | $50,631.41 | $26,726.23 | $23,905.18 | $432,370.06 |
| 4 | $50,631.41 | $25,251.81 | $25,379.60 | $406,990.46 |
| 5 | $50,631.41 | $23,686.45 | $26,944.96 | $380,045.49 |
| 6 | $50,631.41 | $22,024.54 | $28,606.87 | $351,438.62 |
| 7 | $50,631.41 | $20,260.13 | $30,371.28 | $321,067.35 |
| 8 | $50,631.41 | $18,386.90 | $32,244.51 | $288,822.84 |
| 9 | $50,631.41 | $16,398.13 | $34,233.28 | $254,589.55 |
| 10 | $50,631.41 | $14,286.69 | $36,344.72 | $218,244.84 |
| 11 | $50,631.41 | $12,045.03 | $38,586.38 | $179,658.46 |
| 12 | $50,631.41 | $9,665.11 | $40,966.30 | $138,692.16 |
| 13 | $50,631.41 | $7,138.40 | $43,493.01 | $95,199.14 |
| 14 | $50,631.41 | $4,455.84 | $46,175.57 | $49,023.58 |
| 15 | $50,631.41 | $1,607.83 | $49,023.58 | $-0.00 |
As you can see from the table above, your mortgage payment stays the same year after year, but the principal component increases while the interest portion decreases. This trend keeps up until your entire loan amount is paid off.
Mortgage Amortization Rules
You’ll select your amortization period when you first take out your mortgage. You can choose from a variety of lengths, though the amortization period available to you may depend on your financial situation. Further, there are specific rules that govern amortization periods, including your ability to make a change after mortgage initiation.
How Long Can You Amortize Your Mortgage?
Currently, the longest amortization period allowed for insured mortgages is 25 years, though first-time hombuyers purchasing newly built homes can take advantage of a 30-year amortization. Effective December 15, 2024, 30-year amortizations will be available to first-time homebuyers or those who are buying a newly constructed home. For uninsured mortgages, there is no set amortization limit.
There is no set minimum for amortization periods, either. If you can afford it, you could amortize your mortgage over a year if you choose to.
| Note: The federal government has recently announced that insured mortgages — or those with down payments less than 20% of the home’s purchase price — could have amortizations as long as 30 years. The new rule only applies if the home buyer is purchasing their first home or the financed home is new construction. The change will take effect on December 15, 2024. |
Can You Change Your Amortization Period?
Yes, you can change your amortization period by refinancing your mortgage at the end of the term. When refinancing, you can change the rate, term length, and amortization period.
If you want to reduce your monthly mortgage payments, for instance, you may decide to extend your amortization through a refinance. Or, if you’ve become more financially wealthy since you took out your mortgage and can afford bigger payments, you may choose to shorten your amortization to pay your mortgage off sooner.
It should be noted that you don’t necessarily have to wait until the end of the term to refinance. However, if you do this, you may be charged an early prepayment penalty fee. For this reason, it may be worth it to wait until the term end to avoid these extra fees.
Short Vs. Long Amortization Periods: Which is Better?
When you take out a mortgage, you have some choices in terms of how long you want the amortization schedule to be. More specifically, you can choose between short-term amortization periods – such as a 15-year mortgage – or long-term amortization periods – such as a 25-year mortgage. There are pros and cons to each, so you will want to weigh them all before you decide which route to take.
Long Amortization Pros
- Lower monthly payments. Since you have much more time to repay what you owe, you can spread your payments out over a longer period. This translates into smaller installment payments, which is the main advantage of choosing a longer amortization.
Long Amortization Cons
- Takes longer to pay off your mortgage. With a longer amortization period, you’ll have to wait much longer before you’re debt-free.
- More interest paid. Extending your amortization period means you’ll pay more in interest over the long run.
Short Amortization Pros
- Be mortgage-free sooner. The earlier your mortgage is due for full repayment, the earlier you’ll be able to get rid of your loan. The money that otherwise would have been spent on mortgage payments is now available for other expenditures and investments.
- Less mortgage is paid overall. The interest you pay over the life of your mortgage is significantly reduced when you opt for a shorter amortization period. Depending on the loan amount, interest rate, and length of your amortization period, this could translate into tens of thousands of dollars (or more) saved.
Short Amortization Cons
- Higher mortgage payments. Condensing your mortgage loan into a shorter amortization period means you’ll have less time to pay your loan. As such, you’ll have to make larger monthly payments to pay off your loan in full by the due date.
One isn’t necessarily better than the other. It all depends on your situation.
For instance, if money is tight, a long-term amortization period may be ideal because your monthly mortgage payments will be a lot lower. But if you are capable of making big payments, you can save on interest and become mortgage-free sooner rather than later.
Amortization Vs. Mortgage Term
It’s not uncommon for home buyers and homeowners to confuse “amortization” with “loan term“. But these two concepts are different and important to distinguish.
Amortization refers to the total length of your mortgage. A typical mortgage in Canada has a 25-year amortization period, though you can choose any length of time that you’re comfortable with as long as it’s within the allowed limit.
A mortgage term is the length of your current loan contract. Once your term expires, you’ll need to either renew your mortgage or pay it off in full. Most mortgages in Canada have 5-year terms or less, though they can range from 6 months to 10 years.
Extra Payments And Their Effect On Amortization Schedules
Despite having a specific amortization schedule that you stick to with the goal of repaying your entire loan amount, you may also have the opportunity to make extra payments from time to time if you fall upon some extra money. These extra payments, if your loan contract allows it, go entirely towards your principal, not interest.
As you pay down your principal balance when you make extra payments, you’ll owe less in interest overall, since interest is calculated on the principal amount remaining. So, on subsequent payments, you’ll have less interest owing, and more money will go towards paying down your principal.
Not only does this can save you thousands of dollars over the life of the mortgage, but it also helps you pay it off faster, which essentially shortens your amortization.
Types Of Extra Payments And It’s Effect On Your Amortization Schedule
There are a few ways to make extra principal payments towards your mortgage to pay it off faster:
Lump Sum Payments
Many lenders will allow extra payments outside of your regularly-scheduled mortgage payments that can go entirely towards your principal loan amount. This can help you pay your mortgage down faster and help you save money on interest.
For example, let’s use the above example of a $500,000 mortgage with a 6.0% interest rate amortized over 15 years. If you make one lump sum extra payment of $15,000 each year, your amortization period will drop from 15 to 10 years.
If you have the extra funds available every year, you can not only reduce your amortization (and pay your loan off sooner), but you would save $95,389 in interest over the life of the loan.
Increase Payments
You can also increase your regular payment amounts to pay off your principal faster. With this arrangement, you can bump up the amount of your mortgage payments as often as you want to, as long as your lender allows it.
For instance, if your regular mortgage payments are currently $2,500 per month, you could bump them up, if you can, throughout your loan term.
Just making an extra $200 per month payment can shorten your amortization by one year, saving you $20,469 in interest over the amortization.
Final Thoughts
Considering the commitment of a mortgage, it’s a good idea to take some time to get to know all there is to know about these loans, and that includes your amortization schedule. Make sure to discuss your options with your mortgage specialist to help you choose which amortization schedule is best suited for you.
