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Amortization

Jamie David

Your amortization period is the length of time it takes to pay off your entire mortgage. The maximum amount of time you are given depends on how much of a down payment you make when you purchase your home. You already know that the minimum down payment you can make is 5% of the purchase price; however, if you put down anything less than 20% your maximum amortization will be 25 years.

Any mortgage loan with less than a 20% down payment is considered a high-ratio mortgage and must be safeguarded with mortgage default insurance. Commonly known as CMHC insurance, the insurance premium you pay protects the lender in case you default. Because of the added risk a high-ratio mortgage carries, the lender and your mortgage insurance default provider want to ensure you can afford to repay the loan within a set period of time: no more than 25 years, to be exact.

 

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If your down payment is 20% or more of the purchase price, you would take on a conventional mortgage that would no longer need mortgage default insurance; this means your maximum amortization period could be longer - up to 30 years, with most lenders. The good thing about a longer amortization period is that your monthly payments will be lower, since you are paying the mortgage off over a longer period of time. The downside to a longer amortization period is that you’ll also end up paying more interest to your lender. Let’s take a look at an example:

 
Short vs. long amortization periods
 
Scenario A (25 Years)Scenario B (30 years)The Difference
Mortgage amount$300,000$300,000
Amortization period25 Years30 Years5 Years
Interest rate3.49%3.49%
Monthly payment$1,496$1,341$155
Total interest paid over entire loan$148,868$182,854$33,986

 

As you can see, the monthly mortgage payment in Scenario A is more than in Scenario B; that’s because Scenario A has less time to repay the loan. However, by giving Scenario B more time, the lender also earns more interest. In this example, Scenario B would pay nearly $34,000 more in interest than Scenario A.

 
Pros and cons of a short vs. long amortization
 
Short (Up to 25 Years)Long (26-35 Years)
Pros
  • Option to put as little as 5% down
  • Pay off your mortgage sooner
  • Pay less interest over the life of your mortgage
  • Make smaller monthly mortgage payments
Cons
  • Must make increased monthly mortgage payments
  • Must have a 20% down payment
  • Pay off your mortgage later
  • Pay more interest over the life of your mortgage

How to choose a mortgage amortization period

If you have at least a 20% down payment, you can choose the length of your amortization period – and it’s a personal decision. But first, look at the following charts to see which amortization periods other Canadians are choosing.

All homeowners with mortgages

Amortization PeriodAll Homeowners with Mortgages
Up to 24 Years39%
25 Years50%
26-30 Years9%
More Than 30 Years1%

 

Homes purchased between 2018 and 2021

Amortization PeriodHomes Purchased between 2018 and 2021
Up to 24 Years30%
25 Years57%
26-30 Years13%
More Than 30 Years0%

 

As you can see, the majority of Canadians have an amortization period of 25 years. The second most popular amortization period for new mortgages is 26 to 30 years. Notice that no homes purchased from 2018 to 2021 have an amortization period longer than 30 years.

 

Mortgage amortization period rule changes over time1

On July 9, 2012, Finance Minister Jim Flaherty reduced the maximum amortization period for CMHC-insured mortgages to 25 years. The change was the last – so far – in his list of efforts to decrease the amount of household debt Canadians were taking on. Here is a chart showing the changes made to mortgage rules over time:

Until October 2006November 2006October 2008March 2011July 2012
Minimum Down Payment25%0%5%5%5%
Maximum Amortization25 years40 years35 years30 years25 years

 

Ways to shorten your mortgage amortization period

One more thing to keep in mind is you can repay your mortgage before the 25 years is up, if you’re in the financial position to do so, because most lenders offer prepayment privileges. Prepayment privileges allow you to either increase your monthly payments or to make a lump sum payment against the loan.

Talk with your lender to find out exactly what your prepayment privileges are. If you go beyond the privileges set out by your lender, you may incur costly penalties.

 

Alternatives to a short mortgage amortization period

Finally, some experienced investors may choose to amortize their mortgage over a longer period of time, then take the difference between the two payments (in our example, $155 per month) and invest it for greater returns; this strategy has become more popular due to the low interest rates being offered on mortgages.

 

References and Notes

  1. TD Special Report, Department of Finance, 2012, 2008
  2. CREA Annual State of the Residential Housing Market in Canada, Year End 2020

 

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