Amortization is one of those words that perhaps causes your eyes to glaze over and a yawn to appear on your mouth. But it is very important that you understand what it is and how it impacts your mortgage.
Firstly, the basics – what exactly is ‘mortgage amortization’ this and how does it differ to a ‘mortgage term’? Well the answer is pretty straight forward:
Mortgage Amortization is the total amount of time it takes to pay off your mortgage. 25 years is the most common in Canada but other options are available. Why they break it down like this is because a bank/lender doesn’t want to sign a full ’25 year’ loan, as they don’t know what is going to happen so far into the future, so they break this 25 year loan down into smaller chunks called mortgage terms. The most common/popular mortgage situation in Canada is a 25 year mortgage amortization broken down as 5 x 5 year mortgage terms.
The amortization options available to you depend on what stage you are at with your mortgage:
If you’re just buying, you’ll be deciding between a 25, 30 or 35 year amortization.
If you’re renewing your mortgage, you can’t change your amortization or it would become a ‘refinance’. For more on this see: LINK. So, if you got a 25 year amortization to begin with and you’re coming to the end of your first 5 year term, then you’ll renew into a 20 year amortization mortgage.
If you’re refinancing your mortgage, you can choose to increase or decrease your amortization at this point. So, if you got a 25 year amortization to begin with and you’re coming to the end of your first 5 year term, then you can choose to reduce your new mortgage to 15 years, or increase it to 25 or 30 years, for example.
PAYING YOUR MORTGAGE OFF FASTER
Amortization is the maximum amount of time you’re required to take to pay off your mortgage. You can choose to pay it off faster, of course and the most common method of doing this would be by making pre-payments.
A better way of thinking about it, is that your mortgage amortization dictates the minimum payments you must make every month. This is where thinking about the decision can be important as you can reduce your monthly payment by taking a higher amortization – which could be useful for cash-flow and give you more financial flexibility.
So before you skip over this important mortgage term, think about what is best for you and your situation. Our mortgage professionals are happy to answer any questions you might have about this.