HomeIt's important to understand mortgage related terms as this will aid you to make the best financial decisions related to financing homeownership with a mortgage. Let's breakdown both the difference between mortgage term and amortization as well as how they work together. A mortgage term refers to the length of your current mortgage contract — where amortization period is the total time it will take to completely pay off your mortgage.
What is an amortization period?
An amortization period refers to the total length of time it will take you to repay the full amount of your mortgage — this includes both the principal borrowed as well as the interest cost. A short amortization period will allow for more principal to be paid back on each mortgage payment. As a result you will pay less interest compared to the same mortgage with a longer amortization period.
The average amortization period in Canada is 25-years with a maximum amortization period of 25-years for mortgages in Canada that are CMHC insured — there is no maximum amortization period on uninsured mortgages in Canada.
What is a mortgage term?
A mortgage term refers to the length of time that your mortgage contract is active. While the average mortgage term in Canada is 5-years — mortgage terms can range anywhere from 6-months to 10-years. At the end of your mortgage term you will have to renew your mortgage at the current interest rates.
How amortization period and mortgage term work together
Mortgages are often described as the mortgage term followed by the amortization period. The mortgage term let's you know how long the current contract will be active for based on a 25-year amortization schedule. This structure allows for lower monthly mortgage payments that will ensure the mortgage is paid off over the course of the amortization period. Let's take a look at some examples:
5-year term 25-year amortization period: This means that the current mortgage contract is for 5-years and the payments made are based on a 25-year amortization schedule.
10-year term 30-year amortization period: This means that the current mortgage contract is for 10-years and the payments are made based on a 30-year amortization schedule.