Amortization Explained: How the Length of Your Mortgage Impacts Your Payments
When it comes to choosing a mortgage, one of the most important decisions you’ll make is selecting the right amortization period. While many homeowners focus on interest rates and monthly payments, understanding how amortization works can have a significant impact on your financial future.
In this blog post, we’ll break down what amortization means, how it affects your mortgage payments, and how to choose the right amortization period based on your goals.
What Is Amortization?
Amortization refers to the total length of time it will take to fully pay off your mortgage loan, assuming you make all regular payments on schedule. In Canada, the most common amortization period is 25 years, but other options include 20, 15, or even 30 years, depending on the lender and your financial profile.
It's important to note that amortization is different from your mortgage term. The mortgage term is the length of time your mortgage contract is in effect (e.g., 5 years), after which you can renegotiate the rate and conditions. The amortization period is the total time it will take to pay off the mortgage in full.
How Amortization Affects Your Payments
The length of your amortization period directly impacts the size of your monthly payments and the total interest you pay over the life of the loan.
Shorter Amortization Period (e.g., 15 or 20 years):
Higher monthly payments
Less interest paid overall
Build equity faster
Longer Amortization Period (e.g., 25 or 30 years):
Lower monthly payments
More interest paid overall
Slower equity build-up
Here’s a simple example to illustrate: Let’s say you borrow $400,000 at a 5% interest rate.
With a 25-year amortization, your monthly payment would be around $2,326, and you’d pay approximately $297,000 in interest over the life of the loan.
With a 15-year amortization, your monthly payment would increase to about $3,163, but you'd pay only around $169,000 in interest.
The difference? A shorter amortization saves you over $125,000 in interest, even though the payments are higher.
Choosing the Right Amortization Period
The best amortization period depends on your financial goals, income, lifestyle, and risk tolerance. Here are a few scenarios to help you determine what might be right for you:
Choose a Shorter Amortization If:
You want to be mortgage-free faster
You can comfortably afford higher monthly payments
You want to save on interest over time
Choose a Longer Amortization If:
You need lower monthly payments to maintain cash flow
You're buying your first home and want financial flexibility
You plan to make prepayments when your income increases
Many Canadian homeowners choose a 25-year amortization as a starting point, then adjust over time. If you start with a longer amortization but make extra payments (when allowed), you can effectively shorten your amortization and reduce interest costs without locking into higher monthly payments.
Tips to Maximize Your Amortization Strategy
Take advantage of prepayment options: Most mortgages allow you to increase your payments or make lump-sum payments annually. This helps reduce your principal faster.
Re-evaluate at renewal: When your mortgage term ends, reassess your financial situation. If you're in a better position, consider shortening your amortization at renewal.
Use windfalls wisely: Tax refunds, bonuses, or inheritance can be used for lump-sum payments to reduce your amortization period.
Work with a mortgage professional: They can help you model different amortization scenarios based on your budget and long-term goals.
Amortization isn’t just a technical term on your mortgage documents—it’s a key part of your financial strategy as a homeowner. The length of your amortization period determines not only how long you’ll be paying your mortgage, but also how much interest you’ll pay and how quickly you’ll build equity.
By understanding how amortization works and selecting the right approach for your situation, you can save money, reduce financial stress, and work toward your homeownership goals with confidence. If you're unsure which option is best, reach out to a mortgage advisor to explore your choices and create a custom plan that fits your life.
