The amortization period is an important part of the mortgage selection process.  In this article, we explore the amortization period, looking in detail at this often quite confusing element of a mortgage.

amortization-period

What Exactly Is the Amortization Period?

Simply put, the amortization period is the total amount of time it will take for you to pay down your entire mortgage.  It is different to a mortgage term, as these are generally for much shorter periods of time. It is most likely that over the many years that make up your amortization period, you will hold several different mortgages, potentially with a number of different lenders.

If you set up your down-payment to an amount which is under twenty percent of the price you purchased your house for, the maximum amortisation period you will be allowed is twenty-five years.

Consider a long amortization period if….

If you have a longer amortization period, then your monthly mortgage payments will be less.  Depending on how long a period you choose, you will get lower payments which for some people is crucial to them being able to afford to buy a house in Canada.  One thing which is important to consider here, however, would be the interest.  The longer you take to pay the mortgage off, the more interest you will be liable to pay.  Especially in later life, when looking at things such as retirement, this can really play a part in whether or not you have the spare cash to retire.

Considering a short amortization period when….

A reduced amortization period has the potential to save you thousands, if not tens of thousands in interest payments over the lifetime of your mortgage.  Although your monthly payments will be higher, because more of your money is being paid off the principal balance of your mortgage, it allows you to gain an equity advantage on your home much quicker than normal.  Which will eventually lead you to be free from your mortgage sooner than most.

Useful Amortization Acronyms

Here are a few useful explanations of some of the terms used when discussing the topic of amortization.

The Amortization Schedule

This is a detailed outline, most often found in the format of a table which sets out the amortization of the entire loan.  It starts with the principal amount, payments, period of those payments, interest content of the payment, the amount in which the principal is reduced each time a payment gets made, and finally the closing balance.

The Amortization Term

This is the total amount of time needed to repay, or amortize the entire loan for the mortgage.

The Amortization Table

This is a mathematical calculation which is used primarily to formulate the monthly payment amounts; it is based on the interest rate, the term of the loan and the loan amount.

The amortization period can be a real point of confusion for first-time buyers.  Hopefully, by the time you have read this article right the way through to this point, you have been able to understand a little more about the pros and cons of the different periods of time you can choose for your mortgage, and also understand some of the terminologies a little better too.  As with most things which are related to your mortgage, it is best to review your individual circumstances and assess the best options for you, based on your own needs.