The amortization period and mortgage term are two distinct concepts in mortgage financing, often confused but serving different purposes in the loan structure.
Amortization Period
The amortization period is the total length of time it takes to pay off your mortgage in full through regular payments. This period typically ranges from 15 to 30 years, with 25 years being common in Canada.
- Payment Structure: During this period, each payment consists of both principal and interest, with the proportion of each changing over time. Initially, a larger portion of payments goes toward interest, while over time, more is applied to the principal balance.
- Impact on Payments: A longer amortization period results in lower monthly payments but increases the total interest paid over the life of the loan. Conversely, a shorter amortization period leads to higher monthly payments but reduces total interest costs.
Mortgage Term
The mortgage term is the length of time for which the mortgage agreement is in effect. This term can range from as short as six months to as long as ten years, with five years being particularly popular among borrowers.
- Contractual Nature: At the end of the term, borrowers typically have the option to renew their mortgage, renegotiate terms, or switch lenders. The mortgage rate and conditions are locked in for this duration.
- Renewal Considerations: If the mortgage is not fully paid off by the end of the term, a new mortgage must be arranged. This renewal process provides an opportunity to reassess financial needs and market conditions.