Mortgage term vs. amortization

One of the most common sources of confusion for prospective home buyers is the difference between a mortgage term and amortization period. Here is a short answer: A mortgage term is the length of your current contract, at the end of which you'll need to renew; The amortization period is the total life of your mortgage. A typical mortgage in Canada has a 5-year term with a 25- or 30-year amortization period.

Mortgage term

The mortgage term is the length of time you commit to the mortgage rate, lender, and associated mortgage terms and conditions. The term you choose will have a direct effect on your mortgage rate, with short-term rates having historically proven to be lower than long-term mortgage rates. The term acts like a 'reset' button on a mortgage. When the term is up, you must renew your mortgage on the remaining principal at a new rate available at the end of the term.

Mortgage amortization period

The mortgage amortization period, on the other hand, is the length of time it will take you to pay off your entire mortgage. Over the course of your amortization period, you'll sign multiple mortgage contracts. Most maximum amortization periods in Canada are 25 years. Longer amortization periods reduce your monthly payments, as you are paying your mortgage off over a greater number of years. However, you will pay more interest over the life of the mortgage.

Maximum amortization period

Breaking news: Canadian mortgage reform update

On September 16, 2024, the federal government announced sweeping changes to mortgage qualification rules for first-time home buyers, as well as those purchasing newly-constructed homes.

As of December 15, 2024:

• 30-year amortizations will be available for all first-time home buyers, regardless of whether they have an insured mortgage. These extended amortizations are also available for any purchase of new construction.
  
  
• The maximum purchase price for an insured mortgage (where less than 20% down is paid) will be increased to $1.5 million, from the current $1 million.

These are some of the most impactful mortgage reforms announced since 2012, and are anticipated to increase first-time home buyers’ affordability and access to the housing market. 

Learn more about these new mortgage rule changes on the Ratehub.ca blog

The maximum amortization period on all CMHC-insured home purchases made by a non-first-time home buyer is 25 years. The 25-year maximum became the law in June 2012, when the federal government announced the maximum amortization period on CMHC-insured homes would be reduced from 30 to 25 years. CMHC insurance is required on all home purchases with a down payment of 20% or less. Therefore, if you are putting more than 20% down on your purchase, some lenders may accept an amortization period of greater than 30 years.

Prior to this, on March 18th 2011, the maximum amortization on CMHC-insured mortgages was reduced from 35 to 30 years.

Short vs. long term amortization periods

Many home buyers choose shorter amortization periods resulting in higher monthly payments if they can afford to do so, knowing that it promotes positive saving behaviour and reduces the total interest payable. For example, let us consider a $300,000 mortgage, and compare a 25-year versus 30-year amortization period.

The mortgage payments under scenario B are smaller each month, but the homeowner will make monthly payments for 5 additional years. The total interest saved by going with a shorter amortization period exceeds $100,000.

For the savvy investor, these savings should be compared to the opportunity cost of other investments. Using the example above, the monthly savings of $142 under scenario B, could be invested elsewhere, and, depending on the rate of return, could come out ahead after 35 years.

Pre-payment privileges set out by your lender will determine whether you can shorten your amortization period, by either increasing your regular monthly payments and/or putting lump sum payments towards the principal, without penalty. However, beyond these privileges, you will often incur costly penalties for making additional payments.

• Use Ratehub.ca's amortization calculator to easily calculate and compare different amortization schedules for your mortgage.
  
  

Mortgage term popularity data

A 5-year mortgage term is the most popular duration. It sits right in the middle of available mortgage term lengths, between one and 10 years, and, thus, its popularity reflects a risk-neutral average. It also tends to be heavily promoted by major lenders. A further breakdown of mortgage terms shows that about 80% of mortgages have terms of five years or less.

References and Notes

1. Source: Canadian Association of Accredited Mortgage Professionals (CAAMP) Fall 2010 Consumer Report
2. Source: Canadian Association of Accredited Mortgage Professionals (CAAMP) Annual State of the Residential Mortgage Market in Canada 2019