What is an Amortization Period?
The amortization period is the length of time it will take a homeowner to pay off their mortgage, including interest. Amortization periods in Canada typically span from 25 to 30 years.
Why is this term important?
Amortization periods are important as the length of the period impacts the amount of their monthly mortgage payments, as well as how much interest the homeowner will pay over the life of their mortgage. The longer the amortization period, the lower the monthly mortgage payments, but higher the total interest paid by the homeowner.
Here is an example:
Let’s say a homeowner has a $500,000 mortgage with a 5% interest rate. If they choose a 25-year amortization rate, their monthly payments would come to $2,922.95. The total interest they would pay over the course of the 25 years would be $376,885.06.
Now, let’s use the same example but say the homeowner chose a 30-year amortization period. Their monthly payment would be lowered to $2,684.11 but, over the course of their mortgage, they would be paying a total of $466,278.92 in interest. That’s an additional $89,393.86 in interest spread over the extra five years.