What is an amortization period?
The amortization period is the time needed to pay out the full mortgage loan, based on regular payments at a certain interest rate. A long amortization period makes each monthly payment smaller, but the interest rate also affects the total price of the mortgage. On the other hand, if you choose to shorten the amortization period, the total cost of the mortgage will be cheaper. This is because, despite the higher monthly payments, there will be fewer months of interest fees to pay.
In Canada, as of March 2020, the amortization time for CMHC-insured homes must not exceed 25 years. CMHC insurance is required for any down payment that lies below 20% of the total. However, if you want a longer amortization time (i.e., 30-35 years) then the initial amount to pay must exceed one-fifth of the house value.
According to the Canadian Association of Accredited Mortgage Professionals (CAAMP) research data, there has been a decrease in amortization periods that last less than 24 years since 2015. Whereas, the average 25-year overall payment period increased. Consequently, amortizations of over 30 years have practically disappeared because of its lack of benefits (CMHC insurance).
What is an amortization schedule?
A loan amortization schedule is a table that shows each periodic loan payment, and how much of the payment is for interest versus principal. The schedule helps a borrower to keep track of what they owe and when payment is due. The schedule is usually assessed yearly for the update of the amortization steps and payment.
There are different ways to organize your payment schedule. The most common frequencies are weekly, bi-weekly, and monthly. It is important to mention that the frequent payments on the principal may allow you to save thousands of dollars in interest. Thus, it is the most economical choice. So, consider, with the help of your mortgage advisor, choosing this if you have enough affordability on the short-term budget.
What is a mortgage term?
The mortgage term is the contract that locks the client to the general values and includes the rates and conditions of that mortgage loan. Although the most popular term is 5 years, the usual frame of length for a complete mortgage term may divert from six months to ten years. The shorter the mortgage term, the lower will be the interest rate. A mortgage term renewal is a readjustment of the contract based on the principle that remains. When the mortgage term expires but you still owe money, a term renewal will be required. This step allows you to discuss the previous conditions, such as the lender profile, the frequency of payment, the interest rate, and the new term length.
If you don’t want to be stuck for another mortgage term with your current mortgage provider, it is recommended that you talk about this with your mortgage advisor and consider applying for another mortgage contract. However, to change the lender is to rely on updated interest rate patterns, because they can vary along the time, and thus make the final investment either advantaged or more expensive. The previous step should be done as early as possible before the end of the mortgage term because there is some bureaucracy involved in the switch of lenders. Such as a new lender profile and further criteria that might require you to submit a new mortgage application, as well as prove your income, your homeownership, and the property insurance.
How do mortgage terms and amortization periods work together?
The only way to avoid many mortgage terms is to pay down all the loans soon enough or to choose a very short amortization time. Anyways, after each mortgage term, the remaining amount of amortization to pay will keep getting shorter.
With this detail in mind, know that you don’t need to maintain your mortgage conditions after each mortgage renewal. If you keep the contract with the current provider only for the convenience of it, heavier interest fees may affect the overall result. Don’t forget that during renewals you are always allowed to discuss and bargain either with the current lender or with the new one for a better interest rate.
That’s why the usual mortgage term lasts for 5 years: the medium-term average grants both not only an affordable set of installments, but also adequate money-saving that would otherwise cover a long time of interest rates. And as safety is proper not only for the customer but also for the major lenders, short-run mortgage sales are predominant in the Canadian mortgage market, with the 5-years or fewer mortgage terms representing about 80% of the loans.
Therefore, the mortgage term lasts for less than the amortization period, and each step will offer you different conditions and rates, including the mortgage schedule flexibility and the general costs and rates of the loan. For any question that could affect the integrity of your available budget, the wisest thing to do is to ask advice from a mortgage advisor and clarify all the details with any lender.
What is the maximum amortization period?
The Canadian Mortgage and Housing Corporation (CMHC) is the main default insurance provider in Canada. It sets all the regulation standards for mortgages. For houses insured by CMHC, the maximum time of amortization is 25 years. However, if you want to extend the time of payment to more than that, the only thing you can do is pay over 20% of the loan value in the initial payment. This won’t be the case for acquisitions that surpass $1 million. Because of its conventionality, the 25-year amortization period is the most common in the mortgage market.
The 25-year amortization period represents about 58% of all loan payment terms. Whereas the amortization period shorter than this sum is 30%. The payments that go longer than 25 and last until the 30th year are more uncommon. These payments represent the 12 overall mortgages. To add, almost no amortization surpasses 30 years.
What is the most popular mortgage term?
The most common duration for a mortgage term is 5 years. Since the options for the contract fluctuate between one and ten years, the half term is the choice that involves less risk and more predictability, both for the lender and the customer. For this reason, most of the major mortgage lenders, such as the Big Six Canadian banks, usually resort to this average mortgage term.
The main reason to rely on this strict medium-term length of time lies especially around the volatility of the interest rate. To exemplify both extremes, assuming a one-year interval, interest rates, and annual variation could affect the frequently renewed mortgage term and thus make the amortization process more unstable. A mortgage term that lasts as long as ten years could either consider an outdated interest rate or maintain conditions of the contract that would be no longer necessary.
Why is the amortization period longer than the loan term?
The mortgage loan term is the conventional way to assess the ongoing contract conditions. Unlike the amortization period, a mortgage loan won’t usually cover the whole loan payment, unless the mortgage term covers an interval of time in 5 years. The amortization period finishes after multiple mortgage terms. This happens because the amortization term only effectively ends when the whole principal mortgage value is paid, while the mortgage loan terms will only cover specific periods fixed in the amortization schedule.
Frequently asked questions
The range of components of a mortgage process, such as the selection of a lender and the perspective of time to reach home equity, will require specific solutions considering each case. Compatibility is crucial for a mortgage success because this ensures that you will guarantee your home equity soon enough. So, the best thing to do is to discuss the costs and benefits of each situation with reliable and transparent lenders and with professional mortgage advisors. This might spare you a good amount of time and money.
Final thoughts
The acquittal of a real estate loan is always a key step to living independently from any other type of financial lending, given that because of the home equity. Once the amortization gets fully accomplished, the financed house will become yours to keep with no debt. This is in various aspects more beneficial than living on rent. The grant of permanent homeownership stability after the full amortization payment will ensure financial independence from the lender. On expensive homeownership, the long-term loan payment might be the best choice for the amortization since the impact on the monthly budget gets lower. If you’re willing to get free of that debt as soon as possible and avoid heavier interest charges, you might prefer to pay off the loan on a short-term basis.
Of course, the terms, conditions, and mortgage rate of the contract may differ from lender to lender. For example, a federally regulated mortgage lender may offer you a more beneficial interest rate and won’t usually charge extras. Whereas a private lender may heighten the pace of interest and present specific demands. In either case, it’s important to consider both the short-term and the long-term impact of the budget. This consideration will help you avoid any overwhelming fees. When it involves an environment susceptible to volatile interest rates. As one’s financial situation may change during the amortization terms, new goals and demands could arise and change your thoughts about the advantages of your contract.
It is important to note that the sooner that you pay off the principal of the loan, the less you will have to worry about the lows and peaks of interest rates. For example, taking 5 years longer to pay the principal, even at a lower monthly cost, could significantly heighten the final amortization price. This is the main advantage of a short-term amortization time because ultimately, it leads to faster-paced home equity.
It is vital to calculate all the time schedules with your lender, considering your range of affordability, and analyze the potential interest rate scenarios beforehand.
Your IG Consultant can advise you on how to integrate your mortgage into your overall financial plan and can also connect you with an IG Mortgage Advisor, who can advise you on the best mortgage option for your circumstances.
If you don’t have one, you can find an IG Consultant here, and you can also contact an IG Mortgage Advisor here.
Published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Wealth Management Consultant.
Mortgages are offered by Investors Group Trust Co. Ltd., a federally regulated trust company, and brokered by nesto Inc. Licences: Mortgage Brokerage Ontario #13044, Saskatchewan #316917, New Brunswick #180045101, Nova Scotia #202507230; Mortgage Brokerage Firm Quebec #605058; British Columbia, Alberta, Manitoba, Newfoundland/Labrador, PEI, Yukon, Nunavut, Northwest Territories.
Mortgage advisors are licensed professionals and equivalent to the following titles per province: Sub Mortgage Broker/Mortgage Broker in British Columbia, Mortgage Associate/Mortgage Broker in Alberta, Associate/Mortgage Broker in Saskatchewan, Salesperson/Authorized Official in Manitoba, Mortgage Agent/Mortgage Broker in Ontario, Mortgage Broker in Quebec, Mortgage Associate/Mortgage Broker in New Brunswick, Associate Mortgage Broker/Mortgage Broker in Nova Scotia, or Mortgage Broker in Newfoundland & Labrador.
