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Amortization
Amortization, sometimes spelled amortisation in Canadian and international usage, is the total time required to fully repay a mortgage through regular payments of principal and interest. In Canada, amortization (with a z) is the preferred and most commonly used spelling in mortgage contracts, lender documents, and regulatory guidance.
Amortization – Quick Facts
• Amortization defines how long it takes to repay a mortgage in full
• Canadian amortizations typically range from 25 to 30 years
• Longer amortizations lower monthly payments but increase total interest paid
• Shorter amortizations raise monthly payments but reduce total interest
• Amortization affects affordability, qualification, and long-term borrowing cost
What Is Amortization?
Amortization is the period, in months and years, required for a borrower to repay the mortgage balance in full through regular payments. Each payment includes both interest and principal, with the interest component higher at the beginning of the amortization schedule and the principal component increasing over time.
The amortization period is different from the mortgage term. The mortgage term specifies how long the interest rate and contract terms apply, whereas amortization defines the full repayment schedule. For example, a borrower may have a 5-year mortgage term with a 25-year amortization, meaning they’ll need to renew their mortgage contract terms and conditions up to 5 times to fully amortize over 25 years.
In mortgage lending, amortization plays a central role in determining monthly payments, affordability, and total interest cost.
Why Does Amortization Matter for Mortgages?
The amortization period matters for mortgages because it directly affects monthly payments and the total cost of borrowing. A longer amortization spreads repayment over more years, reducing monthly payments and improving affordability, but it increases the total interest paid over the life of the mortgage.
A shorter amortization period accelerates principal repayment, lowers total interest costs, and builds equity more quickly, but requires higher monthly payments. Lenders assess amortization carefully because it influences default risk, borrower resilience, and repayment sustainability.
Amortization also affects mortgage qualification; a longer amortization period could make it easier for borrowers to qualify by reducing monthly payments, subject to lender and regulatory limits.
Common Amortization Periods in Canada
Most Canadian mortgages use standard amortization ranges that align with lender policy and federal guidelines.
25-Year Amortization: The most common amortization for insured and insurable mortgages. It balances affordability and interest costs. A 25-year amortization period is the benchmark for insured and insurable mortgages across lenders.
30-Year Amortization: Available primarily for uninsured mortgages with at least a 20% downpayment; also available for default insured mortgages for first-time homebuyers and those purchasing newly built homes. It lowers monthly payments but increases total interest paid.
Shorter Amortizations: Some borrowers choose amortizations under 25 years to reduce interest costs and pay off their mortgage faster, provided they can qualify on a shorter amortization and can afford the higher payments.
Example Amortization Calculation
Illustration of how a longer amortization lowers monthly payments but increases total interest:
A borrower takes a $500,000 mortgage at a 5% interest rate with a 25-year amortization.
- Monthly payment ≈ $2,908
- Total payments over 25 years ≈ $872,000
- Total interest paid ≈ $372,000
If the same borrower chooses a 30-year amortization:
- Monthly payment ≈ $2,684
- Total payments over 30 years ≈ $966,000
- Total interest paid ≈ $466,000
Common Mistakes and Misunderstandings About Amortization
• Confusing amortization with mortgage term
• Assuming a longer amortization is always better for affordability
• Ignoring the long-term interest cost of extended amortizations
• Believing amortization resets automatically at renewal
• Overlooking how renewal payment shock affects amortization
Frequently Asked Questions (FAQ) About Amortization
What is the difference between a mortgage term and amortization?
A mortgage term refers to the duration of the current interest rate and contract, typically 1 to 5 years. Amortization is the period required to repay a mortgage in full, typically 25 or 30 years in Canada. The mortgage term renews multiple times before the amortization period ends.
Does amortization affect mortgage qualification?
Yes, amortization affects mortgage qualification because it changes the monthly payment used in qualification calculations, directly influencing how much a borrower can qualify for.
Can amortization be changed after a mortgage has closed?
Borrowers can change amortization through refinancing, lump-sum prepayments, or accelerated payment options, subject to lender rules. Borrowers with collateral charge registrations may obtain new mortgage loans up to their initially approved amortization schedule without requalifying.
Is a longer amortization riskier?
Extended amortization periods entail higher total interest costs and slower equity buildup, which can increase the risk of interest rate volatility between renewals, declining property values, or income changes that affect cash flow.
Does renewing a mortgage reset amortization?
Renewing a mortgage does not reset amortization unless the borrower refinances, extends the repayment period when the mortgage is registered as a collateral charge, or due to early prepayments.
Related Terms
• Mortgage Term
• Principal
• Interest
• Prepayment
• Refinancing