The dream of being mortgage-free is something all homebuyers set out to achieve. How long that takes depends on a variety of factors including your amortization period. An amortization period is the length of time it takes for you to pay off your mortgage in full and a very important factor to consider when you get a mortgage.

Amortization is different from your mortgage term.

This is important to note as many people often confuse the two. While amortization is the length of time it takes to pay off your mortgage, a mortgage term is the length of time a homebuyer is locked into a particular lender, interest rate, mortgage features and their associated terms and conditions. Typically, your mortgage term will end before your amortization period ends as the average Canadian chooses a five-year term. In this case, your mortgage will be up for renewal and your amortization period will continue.

How does mortgage amortization work?

In Canada, amortization periods typically range between 15 to 30 years, however, most people choose either 25 or 30 years. If your down payment is less than 20% of the purchase price of your home, the amortization maximum is 25 years.

Home affordability is a key factor when selecting your amortization period. The length of your amortization will determine the amount of your monthly mortgage payments and the interest you pay over time. At the end of the day, you want to ensure you’re able to make your payments and balance other household costs, without stretching yourself too thin.

Why you would choose a longer amortization period

Oftentimes, a longer amortization period is more appealing to homebuyers because it offers lower monthly payments and in some cases, helps them qualify sooner than they anticipated.

If your amortization period is longer, your monthly payments will be less because they are spread across a longer period of time. However, this also means that you’ll be paying more interest over time and build equity in your home at a slower pace.

Why you would choose a shorter amortization period (and how it can save you money)

If you choose a shorter amortization period, your monthly mortgage payments will be slightly higher, however, the interest you pay over time will be much lower. In this case, you’ll end up saving a lot more money in the long-run and own your home more quickly. One of the main reasons why someone will opt for shorter amortization is so that they become mortgage-free faster and pay less interest overall. If this is something you’re considering, it's wise to determine if your financials can support a higher monthly mortgage payment, while balancing other household expenses. Not to mention, you should also consider the prepayment privileges and penalties that lenders have to offer as this will also help lower your interest payments over time.

These terms play a big role in your ability to make lump sum payments toward your mortgage without incurring large penalty fees – which can sometimes amount to tens of thousands of dollars.

How does an Accelerated Payment shorten your amortization period?

If your goal is to pay down your mortgage as quickly as possible, you’ll want to ensure your mortgage includes an accelerated payment option. These are different from conventional mortgage payments as they do not average your payments over a 12-month period. For example, accelerated bi-weekly payments may include 26 payments in a year, allowing a borrower to make 13 months worth of payments. These additional payments allow you to pay down your principal faster (in 23 years instead of 25 years as an example), pay less interest and serve as a key feature to consider if you do choose a shorter amortization length.

An example of how amortization length affects your payments over time

Justin and Sarah buy a home for $800,000 and make a down payment of $160,000 (20%), on a 5-year term with an interest rate of 2%. Here are two scenarios based on whether they choose a longer or shorter amortization period for their mortgage of $640,000.

Scenario 1

Scenario 2

Amortization Period: 25 years

Amortization Period: 20 years

Monthly Payment: $2,713

Monthly Payment: $3,238

Interest Paid: $173,800

Interest Paid: $137,037

Total Paid: $813,796

Total Paid: $777,031

When you work with Homewise, one of our dedicated mortgage advisors will guide you through the process, helping you choose the amortization length that best suits your long-term goals. Working with over 30 banks and lenders, we will help you lock in a full-feature mortgage that you can feel confident about. All you have to do is apply online in just five minutes here.

Be sure to also check out our mortgage payment calculator to compare your monthly payments based on different amortization periods.