Understanding home mortgages in Canada is impossible without a basic grasp on your mortgage term vs. amortization. This is the best online guide to the difference between your amortization and your mortgage term because we have created an easy-to-follow guide to help you understand and select the best amortization period. Read this helpful resource and visit the mortgage rate page to apply for your mortgage.
Essentially, the amortization period is the total length of time it takes to pay off your loan. In most cases, it is much longer than your mortgage term, which represents the length of time you are locked into a certain interest rate. For example, a home loan in Canada may have a twenty-five year amortization period, which means that it has been structured so that it is paid off at the end of twenty-five years if you make all your regularly scheduled payments. During this same period of amortization, you can have several different mortgage terms. If, for instance, you only choose five-year mortgage terms, you will have five different terms over the course of your loan. Each term may be slightly different depending on whether you select fixed or variable rates and the inclusion of other options. That means that your payments may adjust at least every five years but more often if you select variable-rate terms. The interest rate change for each term is passed on to you in the form of a higher or lower mortgage payment during said term.
Because amortization is designed to help you finally pay off your home loan, the portion of your payment that goes to principal and the portion that goes toward interest changes over the amortization period. In the first few years of your loan, most of your payment goes toward interest, although some also goes toward your principal. Over time, the amount that goes toward your principal increases and the amount that goes toward your interest decreases. This is because the principal amount against which interest is calculated is slowly decreasing. Eventually, more of your payment will go toward your principal than toward interest, but that will not happen until many years into your period of amortization.
As with most other questions related to mortgage products in Canada, the answer as to which amortization period is best for you will depend on your circumstances and where you want to spend your money. If you are most concerned about affording your monthly bills, you will want to choose a longer amortization period. The longer your amortization, the lower your mortgage payment will be each month. However, a longer amortization period comes at a cost. Because you are taking longer to pay off your loan, less money goes toward your principal each month, thereby increasing the total amount of interest you will pay over time. So, if you want to reduce the total you spend on interest, you should choose the shortest period of amortization with which you are comfortable.
One thing you should note about amortization is that the amount your payment increases is disproportionate to the decrease in your period of amortization. For instance, you might expect that your monthly payments on a fifteen-year amortized mortgage would be twice as much as your monthly payments on a thirty-year amortized mortgage because the total amortization period is half as long. However, such is not the case. If you take a thirty-year amortization and a fifteen-year amortization with the same interest rate and loan terms, your monthly payment on a fifteen-year loan is only about sixty-eight percent greater than on a thirty-year mortgage. In other words, instead of doubling, your mortgage payment on a fifteen-year loan is only about two-thirds higher than your mortgage payment on a thirty-year loan.
You may want to know how to calculate amortization. In many ways, the answer to this question is complex because it takes a special formula, into which you input your total principal amount, rate of interest and other factors, to calculate your monthly payments. Instead of doing this yourself, you can calculate amortization far more quickly if you use the amortization calculator on this site. It is designed to return your estimated monthly mortgage payment immediately when you input the requested values.
As you are considering which amortization term is best for you, you should know about new amortization rules put into place in 2012. In order to slow down a red hot real estate market and prevent a destructive housing bubble, the Canadian government established new amortization guidelines in June 2012 that went into effect on July 9, 2012. These new rules lower the maximum amortization period from thirty years to twenty-five years on new government-backed mortgages taken out by individuals who put less than twenty percent down on their loan.
Practically speaking, this means that your monthly payments will be slightly higher than they would have been if you took out a loan with less than twenty percent down before July 9, 2012. If you can put twenty percent down, you are still able to choose any amortization period that you want.
Now you have the answer to this question: What is amortization? We will conclude this brief amortization guide with some interesting facts and statistics about amortization in Canada:
• The most popular period of amortization in Canada is twenty-five years. About three quarters of Canadians who have a mortgage have selected a twenty-five year amortization.
• The percentage of mortgage-paying Canadians whose loans have an amortization period of twenty-five years will surely increase now that new amortization rules have taken effect.
• About one-fifth of all Canadians who are paying a mortgage have a period of amortization of thirty years or more.
• Reducing your mortgage amortization period by about five years can reduce your total interest by tens or even hundreds of thousands of dollars over the life of your loan.
• Most Canadians choose five-year mortgage interest terms.
• You will pay off your mortgage before the end of your period of amortization if you pay more than your required mortgage payment each month.