Mortgage Term vs. Mortgage Amortization

 

 

Many borrowers are commonly mistaken in perceiving two dissimilar mortgage aspects, namely Mortgage Term and Mortgage Amortization. Although both the concepts are entirely different from each other, these are sometimes wrongly used as alternatives.

Mortgage Term

The time period through which the lender, mortgage rate and agreed terms & conditions remain constant, is known as the Mortgage term. Once the mortgage term is completed, it is restored with the new market rates and terms of agreement. Moreover, the rate of interest you pay is also determined by the mortgage term you select. A shorter mortgage term would increase the payments and reduce the interest rate, at the same time. In Canada, the Mortgage terms may start from six months and range up to ten years.

 

Mortgage Amortization

The time period through which the entire debt is paid off by the borrower is known as Mortgage Amortization period. In Canada, the maximum period of amortization for CMHC insured mortgage is 25 years, while that for non-CMHC insured mortgage is 40 years. A mortgage amortization may comprise of multiple mortgage terms. Canadian Mortgage and Housing Corporation (CMHC) insurance is obligated for mortgages with the down payment below 20% of overall mortgage value.

 

See the table below to critically review Mortgage Term vs. Mortgage Amortization.

 

PARTICULAR MORTGAGE TERM MORTGAGE AMORTIZATION
DESCRIPTION Time period through which the interest rate, Time period through which the entire debt is
DESCRIPTION terms & conditions and lender remain same paid off
TIME FRAME 6 months – 10 years CMHC Insured: 25 years maximum
TIME FRAME NA Non-CMHC Insured: 40 years maximum

 

Short vs. Long Term Amortization Periods

It is quite certain that the annual mortgage payments equivalently reduce as you extend the overall amortization period. However, the interest you pay in a longer amortization period is very high. On the other hand, the money you save on single installment is not that high. This could be understood by assuming a scenario.

 

AMORTIZATION PERIODS

PARTICULAR 25 YEARS 30 YEARS
Mortgage Amount $300,000 $300,000
Interest Rate 5.10% 5.10%
Monthly Payment $1,762 $1,620
Total Interest $228,580 $339,659
Monthly Payment Difference $142
Total Interest Difference $111,079

 

From the above table it is evident that as you extend your amortization period from 25 years to 30 years, the surplus of the interest you pay dynamically increases by $111,079. In contrast to that, the amount that you save on your monthly payment is just $142.

 

It is therefore preferred by most of the Canadians to pay off their mortgage in a shorter period of time. You can even pay it off in a lesser time either by increasing your monthly payments or paying in full. However, you would have to bear a penalty equivalent to a few months interest.