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Canadian Mortgage Amortization 101

April09
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If you are a resident living in Canada and have ever gone house hunting you might have come across the term “amortization” some time. Like mortgage terms amortization is associated with Canadian mortgage and is a payment process that is related to your loan. However both aspects work differently. Therefore it is best that you know what both of them mean. This will give you a better idea about how a mortgage works.

Mortgage Term

Let’s look at how a mortgage term would work first. This is the time in which you accept the mortgage interest rates as well as the terms and conditions of the mortgage product or tailored loan. The time period or term can be as much as 6 to 10 years. The mortgage terms can be negotiated again once the term has ended.

  Mortgage Amortization

A Canadian mortgage amortization on the other hand is a fixed period of time during which you have to completely pay off your mortgage loan. Unlike a mortgage term, an amortization term lasts longer. In other words it can go strong for as much as 6 to 30 years. The latter also requires a 20% down payment.

Your payments will be higher the shorter your amortization term. However this also means that you will be free from them faster.

How it Works

The amount of interest that you will eventually have to pay off over the course of your mortgage will depend on the length of your amortization period. Needless to say determining the time period is one of the most important decisions that you can make.

The amount of the down payment you choose will also impact on the options you can use. For example larger amounts can get you amortization periods that last for 35 years. However your interest payments will also be higher throughout the course of your mortgage. Unlike a shorter amortization period you will also be building the equity on your home slower.

Your payments will also be more. However you will build on the equity of your home since most of your payments will be added towards your principle balance. This means that you will be free from your mortgage quicker and save up on thousands of dollars.

New Amortization Rules

The maximum Canadian mortgage amortization term in the country hasn’t been more than 30 years. However there has been a change in regulations for mortgages that are issued by CMHC with the term now being reduced to 25 years.

This might seem like an ordeal for potential homeowners however the upside is that the reduced term can give residents a chance to build equity on their homes and be free of their mortgage faster.

Homeowners (potential or otherwise) can still opt for longer amortization periods than the designated 25 years. However they would have to put down a down payment that is more than 20% on each purchase.

Now that you know how amortization rates work you will have an easier time coming to terms with the new Canadian mortgage amortization regulations.

Tags: Mortgage
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