What’s the difference between mortgage amortization and mortgage term?

What’s the Difference?

Mortgage amortization and mortgage term are both important aspects of a mortgage, but they refer to different things.

Mortgage Amortization

Mortgage amortization refers to the process of paying off a mortgage over time through a series of regular payments.

Each payment consists of both principal (the amount borrowed) and interest (the cost of borrowing), with a portion of each payment going towards reducing the principal balance of the loan.

The amortization period is the length of time it takes to pay off the mortgage in full, and it is typically between 15 and 30 years.

Mortgage Term

Mortgage term, on the other hand, refers to the length of time that a mortgage contract is in effect.

This term can be shorter than the amortization period, and it is the period during which the interest rate and other terms of the mortgage are fixed.

At the end of the mortgage term, the borrower may choose to renew the mortgage or refinance it with a new term and interest rate.

For example

A borrower might have a 30-year mortgage with a 5-year term.

This means that the borrower has 30 years to pay off the mortgage in full, but the interest rate and other terms of the mortgage are fixed for the first 5 years.

At the end of the 5-year term, the borrower can either renew the mortgage with the same lender or refinance with a new lender.

The new term and interest rate will be based on current market conditions and the borrower’s financial situation at that time.

scales of justice measuring time on one scale and money on the other

Conclusions and Further Thoughts

Typically, in Canada, mortgage terms are between 3 and 7 years with the 5-year term being the most popular. Over the past 12 months, mortgage rates have been rising back to historical Canadian amounts; 5-6%.

However, many borrowers are opting now for shorter terms than the popular 5-year term. This is because Canadians became very used to very low rates during the time period of 2008-2022 when rates were in a 2-3% range.

Taking shorter terms means that Canadians are betting that mortgage interest rates will be lower at that time than they are now.

I hope they are right…

What’s the difference between mortgage amortization and mortgage term?