What is the difference between the term and amortization of a mortgage?

Alyssa Furtado
by Alyssa Furtado October 1, 2010 / No Comments

Whether a first-time home buyer or experienced mortgage shopper, when it comes time to finding the best mortgage rate, you will have to make important decisions about the term and amortization of your mortgage.

If a friend has just decided on a 5-year variable rate for a mortgage that will take them 25 years to pay off, the 5-year period refers to the term, and 25-year period refers to the amortization of their mortgage. The term is related to the specific mortgage rate, while the amortization period determines how long it will take a homebuyer to pay off their mortgage. Let’s now look at both in more detail.

A term is the length of time you commit to the rules, conditions and interest rate with a specific lender. Though a term can last anywhere from 6 months to 25 years in Canada, 62% of Canadians select a term lasting 4 or 5 years.
Let’s look at an example:
Currently BMO is offering a 5-year fixed mortgage rate with a 3.59% interest rate. If you select this, you will pay 3.59% for the next 5 years. You must also follow the rules and conditions of the mortgage such as 10% prepayment options and refinancing restricted to BMO only.

An amortization period is the length of time it takes for a homeowner to pay off their entire mortgage assuming a specific interest rate. In Canada the amortization period must be less than 35 years and many lenders require the minimum period to be 15 or 25 years to lend money. In Canada, 82% of mortgages have an original amortization period of 25 years or less. As you extend the amortization period you will be able to lower your monthly payments; however the longer you take to pay off your home, the more interest you will accrue.

categories: Mortgages