Mortgage Terms vs Amortization Periods: Understanding the Basics

An amortization period and a mortgage term are two parts of a mortgage that determine your payment schedule, total interest paid, and number of years before the loan is paid in full.

To put it simply, an amortization period is the length of time you will be paying off your mortgage. At the end of your amortization period, you should be mortgage free. Most amortization periods are between 20 and 30 years.

A mortgage term is the amount of time you are locked into a mortgage contract. The mortgage term can last anywhere from 6 months to 10 years, depending on the type of mortgage you choose. However, most terms are around 5-years. You’ll likely experience many mortgage terms during the life of your mortgage.

An amortization period is the total length of your mortgage. It might be 20 years, it might be 30 years, regardless of the number of years, it’s still referred to as an amortization period.

When your amortization period is over, your mortgage should be 100% paid off. But, the time it takes to become mortgage-free matters because you could be spending a lot more money than you need to.

This is due to interest rates. Mortgage payments are made on either a monthly or biweekly basis. Payments will cover the principal (the amount borrowed) and interest. How much interest you pay depends on your interest rate. In Canada right now, most interest rates for mortgages are between 2.65% and 5.50%

A 30-year amortization period could have a lower interest rate than a 25-year period, but you’ll be making interest payments for an additional 5-years. This can add to tens of thousands of dollars depending on your interst rate. 

But fear not, your interest rate will change throughout the life of your mortgage, possibly many times, depending on the type of mortgage you choose. We’ll look into that more as we explore what a mortgage term is.

A mortgage term is much shorter than the amortization period. It’s usually between 6 months and 10 years, but 5 years is one of the most common term lengths in Canada. At the beginning of every term, you will be able to adjust several things about your mortgage agreement including the interest rate.

There are two types of interest rates available for mortgages in Canada: fixed and variable. They both have their own strengths and weaknesses.

A fixed interest rate will not change for the length of your mortgage term. Again, 5 years is one of the most common mortgage terms in Canada, so, in this case, your interest rate would not change at all if you choose a fixed interest rate. That can be good if the market is experiencing more ups and downs than a bungee jumper. You can enjoy a ton of stability knowing your interest rate is locked down until your mortgage term ends.

However, you might miss out on some savings if the interest rates plummet after you agreed to a higher fixed rate. There’s really no way to know exactly what’s going to happen.

A variable interest rate is allowed to change. It is based on a nationally agreed-upon interest rate called Prime which is adjusted several times per year. Variable interest rates are slightly higher than the prime rate–lenders add a percentage point or two–and they rise and fall according to how Prime behaves. If prime goes up, your variable interest rate goes up. If Prime goes down, so does your mortgage rate.

Variable rates are usually a fair bit lower than fixed rates to account for the likelihood of changes to Prime.

Imagine your mortgage like a pie, a delicious apple crumble pie that costs you hundreds of thousands of dollars. The whole pie represents your amortization period, the total length of time your mortgage exists. Each slice of the pie represents a mortgage term where you renew the mortgage contract and choose a new interest rate. As each slice is removed, the total amount of pie, your mortgage amortization period, gets shorter and shorter until the entire pie is gone and you’re mortgage free.

Most mortgages are between 20 and 30 years long. A 20-year mortgage will have higher monthly payments, but you’ll have the principal paid off quickly.

Steep monthly mortgage payments may sound like a downer, but there are some serious benefits to paying off your mortgage as fast as possible, like paying thousands and thousands of dollars less in interest over the life of your mortgage. If you can afford to choose a shorter mortgage, you might want to consider doing so if it’s in your best interest.

A 25-year mortgage is a common amortization period in Canada, and the maximum allowed by the Canada Mortgage and Housing Corporation (CMHC) for them to insure a home. A CMHC insurance is legally required for all home purchases when the down payment provided by the buyer is 20% or less of the purchase price. However, if you’re able to put more than 20% down, some lenders will offer 30-year mortgages.

30-year mortgages are great when money is a little tight. The monthly payments are lower than 20- or 25-year mortgages which is great. But, over the entire 30 years, you’ll end up forking over more money in interest. That doesn’t mean a 30-year amortization period is necessarily a bad thing, however. The money you save each month thanks to the lower mortgage payments could be used to invest in retirement savings or an RESP for your kids.

Hopefully you’re less confused about the difference between amortization periods and mortgage terms. They are simple concepts to understand, but as we’ve shown, can have far-reaching implications for your finances and your future.

It’s always a good idea to do your research before you apply for a mortgage. Contact a mortgage broker or a loans officer at your local financial institution and ask some questions. They’ll be happy to help you understand which mortgage may be right for you.