Mortgage terms and amortization
Think twice before extending your amortization to lower your payments. The interest costs that you’ll need to pay will be higher. This may add up to thousands or tens of thousands of dollars.
Contact your financial institution to discuss your options.
Use the Mortgage Calculator to estimate your payment amounts and interest costs.
What are mortgage terms and amortization
When you’re shopping for a mortgage, you need to choose the term and amortization period.
The term and amortization period impact:
- your overall costs
- your interest rates
- the amount of your regular payments
Mortgage term
The mortgage term is the time your mortgage contract is in effect. Terms may range from a few months to 5 years or more.
At the end of each term, you’ll need to renew your mortgage. You’ll likely need multiple terms to repay your mortgage. If you pay the balance at the end of your term, you don’t need to renew your mortgage.
Mortgage amortization
The amortization period is the time it takes to pay your mortgage. The amortization period is an estimate based on your current term's interest rate.
If your down payment is less than 20% of your home’s price, your maximum amortization period is:
- 30 years if you’re:
- a first-time buyer and/or
- purchasing a new build
- 25 years in all other cases
If your down payment is more than 20% of your home’s price, your lender sets your maximum amortization period.
Figure 1: Example of a $300,000 mortgage with a 5-year term and a 25-year amortization period
Text version: Figure 1
Visual representation of a $300,000 mortgage with a 5-year term and a 25-year amortization. The mortgage amount decreases from year 1 to year 25, according to the payments. Years 1 through 5 represent the term. Years 1 to 25 represent the amortization.
Types of mortgage terms
Mortgage terms may range from a few months to 5 years or more. The length of your mortgage term impacts your interest rate.
Short-term mortgage
Most Canadian mortgage holders have a term of 5 years or less. These are short-term mortgages. With a shorter term, you renew your mortgage contract sooner.
You may:
- choose a fixed or a variable interest rate
- take advantage of a lower interest rate when you sign up
Long-term mortgage
Long-term mortgages have a term greater than 5 years. With a longer term, you keep the conditions of your mortgage contract for longer.
You may:
- only have the option of a fixed interest rate
- lock-in an interest rate for a longer period
- pay a substantial prepayment penalty if you sell your home within the first 5 years of your term
Convertible term mortgage
A convertible term mortgage is a short-term mortgage that your lender may convert into a long-term mortgage. When your lender converts or extends your mortgage, your interest rate changes.
How the mortgage term affects your costs
Your mortgage term sets the duration of your contract.
The length of your term may impact:
- your interest costs
- the amount of your prepayment penalty if you break your mortgage contract
Interest costs
Your mortgage may have a fixed or a variable interest rate. A fixed interest rate stays the same throughout the duration of your term. A variable interest rate may change during your term.
Lenders may offer different interest rates for different interest types with a comparable term length.
For example, for a 5-year term, they may offer you:
- a fixed interest rate of 5.5% or
- a variable interest with an initial rate of 6.5%
Lenders may also offer different interest rates for different mortgage term lengths. They usually offer lower rates for shorter terms and higher rates for longer terms.
Your interest rate has an impact on your mortgage payments. Your payments are higher if your interest rate is higher.
Figure 2: Example of monthly payments for a $300,000 mortgage with a 25-year amortization period at different interest rates
Text version: Figure 2
| Interest rate | Monthly payment | Interest cost over 5 years | Interest cost over 25 years |
|---|---|---|---|
| 2.5% | $1,343.90 | $34,547.72 | $103,169.61 |
| 2.9% | $1,404.39 | $40,192.59 | $121,316.44 |
| 3.4% | $1,482.02 | $47,285.46 | $144,606.01 |
| 3.8% | $1,545.70 | $52,986.59 | $163,711.17 |
| 4.0% | $1,587.06 | $55,845.39 | $173,418.18 |
| 4.5% | $1,660.42 | $63,014.30 | $198,125.66 |
| 4.8% | $1,710.82 | $67,329.43 | $213,245.00 |
| 5.0% | $1,744.81 | $70,211.42 | $223,444.49 |
| 5.2% | $1,779.13 | $73,097.31 | $233,738.23 |
Shop around to get the best interest rate for your mortgage term. You may be able to negotiate a lower interest rate with your lender or mortgage broker.
Learn more about interest on mortgages.
Learn more about choosing a financial institution.
Prepayment penalty costs
You may need to pay a prepayment penalty if you:
- renegotiate your mortgage before the end of your term
- pay off your mortgage before the end of your term
- pay more than your prepayment privileges
The amount of your penalty depends on the type of mortgage you have. It also depends on the conditions of your mortgage contract. This amount could be thousands of dollars.
When choosing the length of your term, consider your situation. If you plan on moving soon, a shorter term may be better for you.
Learn more about mortgage prepayment penalties.
How the amortization period affects your costs
With a longer amortization period, your payments are lower. However, when you take longer to pay off your mortgage, you pay more in interest.
Figure 3: Example of monthly payments for a $300,000 mortgage with a 4% interest rate and different amortization periods
Text version: Figure 3
| Amortization | Monthly payment |
|---|---|
| 10 years | $3,033 |
| 15 years | $2,214 |
| 20 years | $1,813 |
| 25 years | $1,578 |
Figure 4: Example of the total cost of a $300,000 mortgage with a 4% interest rate and different amortization periods
Text version: Figure 4
| Amortization | Total cost of interest |
|---|---|
| 10 years | $63,919 |
| 15 years | $98,541 |
| 20 years | $135,057 |
| 25 years | $173,418 |
Consider the long-term costs when you choose your amortization period. A longer amortization period may add thousands or tens of thousands of dollars to the cost of your mortgage.