The amortization period is an important consideration when applying for a mortgage.
It determines how long it will take to pay off your mortgage through regular payments.
However, the amortization period also affects other aspects of your mortgage.
This guide explains how amortization periods work, other elements involved, and what you should consider when choosing one for your mortgage.
Amortization Periods Explained
Your chosen amortization period affects how long it will take to pay off your mortgage, how much interest you will pay, and your payment amount.
Lenders offer amortization periods for set lengths of time.
The most common amortization period in Canada is 25-years.
However, 10, 15, 20, and 30-year periods are also available, but you may not qualify for them all.
If you have a down payment of less than 20 percent when you buy you are limited to a maximum amortization period of 25-years.
This is because the lender considers the mortgage riskier.
If you want to obtain a mortgage with less money down, you need CMHC mortgage default insurance.
This protects lenders if a borrower defaults and also allows you to borrow up to 95% of the purchase price of a home.
If you have a down payment of more than 20 percent, you do not need CMHC mortgage default insurance and you can apply for a mortgage with a 30-year amortization.
However, these mortgages aren’t common and lenders may charge a slightly higher interest rate.
If you choose a longer amortization period it will take longer to repay your mortgage and you’ll pay more interest in aggregate.
However, your payments will also be lower.
If you choose a shorter amortization period it will take less time to repay your mortgage and you’ll pay less interest.
However, your payments will be higher.
When determining which amortization period best suits you, consider your finances and how long you intend to own the property.
If you are mortgaging it as an investment, you may want to minimize your payments to maximize your rental cash flow.
If you consider the property your forever home, you may want to choose the shortest amortization you can reasonably afford within your budget.
However, you need to build in leeway as your mortgage payments won’t remain the same throughout the amortization period.
Canadian mortgages include a “term”.
At the end of the term the mortgage comes up for “renewal” and payments are adjusted according to the current interest rate.
We discuss this in length later in this guide.
The following table provides a rough idea of the balance between your amortization period, costs, and availability.
However, many other factors can affect your mortgage.
For instance, some mortgages allow accelerated weekly or bi-weekly payments to reduce interest paid and your amortization period.
Others allow you to increase your payments by a certain amount each year without penalty, with the same results.
| 10-Years | 15-Years | 20-Years | 25-Years | 30-Years | |
|---|---|---|---|---|---|
| Interest Paid | Low | Low-Mid | Mid | Mid-High | High |
| Payment Amount | High | High-Mid | Mid | Mid-Low | Low |
| Interest Rate | Potentially lower |
Standard | Standard | Standard | Potentially higher |
| Availability | Common | Common | Common | Common | Rare |
Maximum Amortization Period
After the U.S. financial meltdown in 2008, Canada reduced the maximum amortization allowed to 35-years.
About a decade ago, this dropped to 30-years through most mainstream lenders.
However, 30-year mortgages do exist through alternative lenders and often carry higher interest rates.
A 30-year term may seem very attractive to some buyers due to the cost of housing in many Canadian regions.
They can enter the housing market by stretching their payments over a very long time.
However, barely meeting qualifications may not be the wisest financial decision and it may be why many lenders now shy away from this amortization length.
Mortgage Term vs Amortization Period
Canada does not have mortgages with a fixed interest rate throughout the entire amortization period.
Instead, the mortgage is divided into terms.
In Canada, most mortgages have terms of five years or less.
At the end of the term, the lender recalculates the mortgage payments based on the current rates and the term length.
Borrowers can choose to lock-in the interest rate for the term (fixed rate) at a higher rate or they can float the interest rate against Canada’s prime rate (variable) and hope interest rates remain stable.
Frequently Asked Questions
- What is the best amortization period?
- What is a 20-year amortization?
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A 20-year amortization refers to the time it takes to pay off your mortgage if you make your regular payments on time. If you increase your payment frequency or make extra payments or lump sum payments, you will pay less interest, shorten the amortization period and be debt-free sooner.
