Mortgage terms and amortization

What are mortgage terms and amortization

When you’re shopping for a mortgage, you need to choose the term and amortization period.

The term and amortization period impact:

your overall costs
your interest rates
the amount of your regular payments

Mortgage term

The mortgage term is the time your mortgage contract is in effect. Terms may range from a few months to 5 years or more.

At the end of each term, you’ll need to renew your mortgage. You’ll likely need multiple terms to repay your mortgage. If you pay the balance at the end of your term, you don’t need to renew your mortgage.

Mortgage amortization

The amortization period is the time it takes to pay your mortgage. The amortization period is an estimate based on your current term's interest rate.

If your down payment is less than 20% of your home’s price, your maximum amortization period is:

30 years if you’re a first-time buyer purchasing a new build
25 years in all other cases

If your down payment is more than 20% of your home’s price, your lender sets your maximum amortization period.

Figure 1: Example of a $300,000 mortgage with a 5-year term and a 25-year amortization period

Types of mortgage terms

Mortgage terms may range from a few months to 5 years or more. The length of your mortgage term impacts your interest rate.

Short-term mortgage

Most Canadian mortgage holders have a term of 5 years or less. These are short-term mortgages. With a shorter term, you renew your mortgage contract sooner.

You may:

choose a fixed or a variable interest rate
take advantage of a lower interest rate when you sign up

Long-term mortgage

Long-term mortgages have a term greater than 5 years. With a longer term, you keep the conditions of your mortgage contract for longer.

You may:

only have the option of a fixed interest rate
lock-in an interest rate for a longer period
pay a substantial prepayment penalty if you sell your home within the first 5 years of your term

Convertible term mortgage

A convertible term mortgage is a short-term mortgage that your lender may convert into a long-term mortgage. When your lender converts or extends your mortgage, your interest rate changes.

How the mortgage term affects your costs

Your mortgage term sets the duration of your contract.

The length of your term may impact:

your interest costs
the amount of your prepayment penalty if you break your mortgage contract

Interest costs

Your mortgage may have a fixed or a variable interest rate. A fixed interest rate stays the same throughout the duration of your term. A variable interest rate may change during your term.

Prepayment penalty costs

You may need to pay a prepayment penalty if you:

renegotiate your mortgage before the end of your term
pay off your mortgage before the end of your term
pay more than your prepayment privileges

The amount of your penalty depends on the type of mortgage you have. It also depends on the conditions of your mortgage contract. This amount could be thousands of dollars.

When choosing the length of your term, consider your situation. If you plan on moving soon, a shorter term may be better for you.

Learn more about mortgage prepayment penalties.

How the amortization period affects your costs

With a longer amortization period, your payments are lower. However, when you take longer to pay off your mortgage, you pay more in interest.

Figure 3: Example of monthly payments for a $300,000 mortgage with a 4% interest rate and different amortization periods

Figure 4: Example of the total cost of a $300,000 mortgage with a 4% interest rate and different amortization periods

Consider the long-term costs when you choose your amortization period.A longer amortization period may add thousands or tens of thousands of dollars to the cost of your mortgage.

Mortgage terms and amortization - Canada.ca (2024)