Mortgage Term vs Amortization: Difference and Why It Matters

Do you want to reduce your monthly payments, accelerate your mortgage payoff, and lower total interest? If yes, you need to know the difference between mortgage term vs amortization.

Today we’re going to break down these key concepts and reveal how choosing the right combination impacts your payments and overall cost. Let's get you mortgage-savvy.

What is a Mortgage Term?

The mortgage term is the length of your initial agreement with a lender, specifying the interest rate and other conditions. At the end of this period, the interest rate and other contract terms will be renegotiated and updated. Common mortgage term lengths in Canada are 1-year, 2-year, and 5-year (most popular); but originally, it can range from 6 months to 10 years.

What is Amortization?

Now, what is the amortization period? Amortization is the total time it takes to fully repay the mortgage principal (the original loan amount) and interest, which is usually 25-30 years. (Read more about “30-Year Mortgage in Canada”)

When considering mortgage term vs amortization in Canada, note that amortization length affects payment size and total interest. A longer amortization period has lower payments, but significantly higher total interest paid; while shorter amortizations have higher payments but reduce the overall interest paid.

Mortgage Term vs Amortization: Key Differences

Now that we know what is amortization of a mortgage (as well as its term), let's see how they differ from each other and work together in a mortgage:

• There are multiple mortgage terms in an amortization period. After each term comes the renewal or refinancing, rates and conditions are updated, and the amortization decreases.
• A key difference between the amortization period vs term is that the mortgage term outlines parties’ obligations for a determined period, while the amortization defines the overall payment schedule.
• Shorter terms allow you to renegotiate rates more frequently; yet often lead to increased interest rates at renewal. Longer terms offer stability throughout your payments but may result in higher interest if market rates fall.
• The amortization length affects affordability by influencing monthly payment sizes, while the mortgage term affects the interest rate and contract conditions when renewing the agreement.
• When mortgage terms are updated during renewals, the original amortization period doesn’t necessarily change, unless you adjust the payments or prepayments.

Check out this video for a quick recap of comparing term and amortization.

How Long Are Mortgages in Canada?

When explaining what is mortgage amortization, it was mentioned that new mortgages are usually 25-30 years. If the down payment is less than 20%, the maximum amortization for insured mortgages is 25 years. This period can stretch to 30 years for first-time and new-construction buyers.

Frequently Asked Questions

Can you change your amortization period?

You can decrease or increase the amortization length when renewing your mortgage. However, this could depend on the market rates and the lender’s cooperation.

What happens at the end of your mortgage term?

You need to renew the mortgage unless the full balance is paid by the end of your term.

What does 5-year term 25-year amortization mean?

It’s a classic example to understand mortgage term vs amortization. It means that you’ll repay the full loan over 25 years, but at the beginning of each 5-year term, you and your lender will agree on the interest rate, payment amount, and any other conditions in the contract.

Can you still get a 35-year amortization in Canada?

While prime lenders don’t provide 35-year amortizations, alternative lenders may offer it, especially in the case of at least a 20% down payment or substantial home equity.

Is it better to shorten your mortgage term or overpay?

It depends on your financial situation and goals. Shortening your mortgage term generally saves more interest and leads to faster repayment but reduces payment flexibility. Overpaying lets you adjust payments but may not save as much overall interest.

The Bottom Line

Choosing the right mortgage amortization vs term is a crucial step in responsible homeownership. Don't hesitate to seek professional advice and use online mortgage calculators to explore different combinations. Take your time and make a choice that’s best for your situation.