What is mortgage amortization and how can it help you understand your mortgage?
Mortgage amortization gives you a glimpse into your mortgage payments and the total amount of time to pay off your home.
Updated 
5 min. read
Buying your own home can be a major milestone — and a significant investment. Many Canadians take out a mortgage to buy a home and must repay the home loan, including principal and interest. While homeownership can be an exciting new stage in anyone’s lives, it can also involve lots of paperwork and new terms you may not have heard of before, such as mortgage amortization. Let’s find out what mortgage amortization means.
What is mortgage amortization and how does it work?
Mortgage amortization refers to the time that it will take to pay off your mortgage. In Canada:
For uninsured conventional (standard) mortgages, the maximum amortization is 30 years.
If the mortgage is default insured, then the maximum amortization is 25 years or 30 years for First-Time Home Buyers purchasing a property and for customers purchasing an owner-occupied newly built home (New Construction) where Loan To Value (LTV) must be greater than 80%. Applicable premium rates apply.
A mortgage term is the length of time you're committed to a mortgage rate and lender. It outlines the length of your mortgage contract which may last months or years. When you’ve reached the end of your mortgage term, you can renew your mortgage with your same lender or opt to transfer with a new lender. Given that mortgage amortization may be up to 25 years or more, it’s likely you’ll have various mortgage terms until before your home loan is paid off. BMO offers borrowers mortgage terms from 6 months to 10 years, with 5 years being the most common mortgage term.
The way mortgage amortization works is that you’ll initially pay more in interest than principal, then toward the end of your repayment, that’ll switch. Essentially, your payments will pay down the principal portion of your mortgage over time. This means that you’ll get charged less interest.
If you have a fixed-rate mortgage, your payments will be predictable. However, if you have a variable-rate mortgage, they may fluctuate over time. Your mortgage term will also play a role in the rate you get.
Canadian borrowers may have a shorter-term mortgage with a term of up to five years or a longer-term mortgage beyond five years. Both the mortgage payment and the rate, whether fixed or variable, will determine the mortgage amortization and how long it takes to completely pay off your mortgage loan.
Both your term and rate will determine the mortgage amortization and when the loan is completely paid off.
A short amortization period means paying off your mortgage faster and paying less overall interest. The tradeoff is that you’ll have higher mortgage payments. A longer amortization means a longer runway to pay off your mortgage. This can result in paying more toward interest but with lower monthly payments.
Using the BMO mortgage payment calculator, you can run some numbers to see how different amortization periods affect how much you pay toward your principal balance and interest. Here’s an example of how amortization can affect your monthly payment, principal, and interest.
25-year amortization, 5-year fixed term (closed) | 15-year amortization, 5-year fixed term (closed) | |
|---|---|---|
Home purchase price | $400,000 | $400,000 |
Down payment | $80,000 (20%) | $80,000 (20%) |
Interest rate | 6.49% | 6.49% |
Mortgage payment | $2,141 per month | $2,771 per month |
Principal paid | $32,206 | $76,560 |
Interest paid | $96,284 | $89,681 |
This chart is for illustrative purposes only. All figures are directional. Source: BMO Mortgage Payment Calculator
If you go with the longer amortization period of 25 years, you can reduce monthly payments by about $600. On the other hand, you pay more in interest payments, meaning it takes longer to pay off your mortgage balance.
Making extra lump sum payments can also affect your mortgage amortization, shortening the amortization period and allowing you to save money on interest. Extra payments may lower your amortization but won’t affect your payment within your current term. It affects the ratio of what goes toward principal and what goes toward interest. That’s why it’s important to understand the impact of rising interest rates.
What is an amortization schedule and how does it work?
An amortization schedule shows the total amount of time it’ll take until your mortgage is paid off. This is based on the term you select when you take out the mortgage. More importantly, it breaks down mortgage payments and illustrates how much is allocated toward your principal balance and the interest. Year by year, you’ll see where your payments are going and see your loan balance go down.
As part of your amortization schedule, you’ll typically see:
The month or year
The mortgage payment
The amount that goes toward interest
The amount that goes toward principal
Your remaining balance
Here’s a sample amortization schedule based on a $400,000 home with 20% down and a $320,000 mortgage with a 5-year fixed term. The interest rate is 6.49% and the amortization period is 25 years.
Year | Mortgage Payment | Principal paid | Interest paid | Balance |
|---|---|---|---|---|
Year 1 | $19,273 | $5,206 | $14,067 | $314,794 |
Year 2 | $25,698 | $5,704 | $19,994 | $309,090 |
Year 3 | $25,698 | $6,081 | $19,617 | $303,009 |
Year 4 | $25,698 | $6,482 | $19,216 | $296,526 |
Year 5 | $25,698 | $6,910 | $18,788 | $289,616 |
This table is for illustrative purposes only. All figures are directional. Source: BMO Mortgage Payment Calculator
As you can see, in the beginning stages much of your mortgage payment goes toward interest rather than principal. Slowly over time, that starts to switch as you pay down interest and then can tackle the principal balance.
How does mortgage renewal affect your remaining amortization?
Once your mortgage term ends, you’ll renew it. Your current lender might offer different terms and rates, but you can also shop around for a new lender. Whichever term you pick won’t affect your remaining mortgage amortization.
How do you calculate mortgage amortization?
To calculate mortgage amortization, you need your mortgage loan amount as well as rate and payment. All these factors will determine your monthly payments and therefore your amortization period. The easiest way to see the impact that mortgage amortization has on your mortgage payments is through the BMO Mortgage Payment Calculator.
Ready to begin the homebuying process? You can look into pre-qualification and pre-approval or talk to an expert at BMO to help get you started.
FAQs
In Canada, the amortization can be up to 30 years for down payments of 20% or higher with most lenders. For insured mortgages, if you’re a first-time homebuyer, a customer purchasing an owner occupied newly built home (new construction) or if you are refinancing your property for the purpose of financing the construction of a legal secondary unit, the maximum amortization period for a mortgage is 30 years (the property must be owner-occupied). For other default insured programs, the longest amortization period is 25 years.
You may be able to extend your mortgage amortization when it’s time to renew your mortgage or if you refinance. This can mean lengthening the time it takes to pay off your mortgage. While that will lower monthly mortgage payments, it also means a significant increase in interest. An extended amortization is considered refinancing and will require a new application, which is subject to approval. footnote star
There are several scenarios that may change your amortization period. These situations include:
Refinancing your mortgage: This offers you the flexibility to adjust the length of your amortization.
Making lump sum payments: Can impact your remaining balance and lower your amortization period, also called re-amortization.
Rising interest rates: Higher interest rates can lengthen the amortization period for variable rate mortgages.
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Footnote star details Subject to meeting BMO’s standard lending criteria. Appraisal and other fees may apply. Please consult your lending agreement(s) or contact a BMO representative.