A study by the Financial Consumer Agency of Canada and the Bank of Canada last year showed that there is a low level of awareness amongst Canadians about mortgage terminologies, particularly on the difference between a mortgage term and an amortization period.
A mortgage term, simply put, refers to the length of time you agree to stay committed with your current interest rate, your loan terms and conditions, or your lender.
A five-year fixed mortgage, for instance, means that you agree to pay for a fixed interest rate for a span of five years. When your fixed term ends, it would be up to you to decide what you will do next: refinance with another lender, renew your mortgage term under different conditions and a new fixed rate, or switch to a variable-rate mortgage.
Also read: What difference do interest rates make on your mortgage?
On the other hand, the amortization period is the length of time it will take you to pay off your entire home loan. In Canada, the maximum amortization period used to be 35 years. However, the government shortened the amortization period of insured mortgages to 25 years.
While a longer amortization period provides relief in terms of monthly repayments, it also inflates the overall interest paid on the loan. Shorter amortization period, on the other hand, makes monthly repayments larger but reduces the overall interest costs.
Below is a sample comparison between 25-year and 30-year amortization periods for a $450,000 home loan. The table shows their difference in terms of monthly repayments and overall interest costs. Please take note that this calculation assumes a fixed interest rate of 4.75% for the whole loan period.
|
|
25-Year Amortization Period |
30-Year Amortization Period |
|
Monthly Repayments |
$2,565.53 |
$2,347.41 |
|
Total Interest Paid |
$319,658.44 |
$395,068.69 |
|
Total Loan Repayments |
$769,658.44 |
$845,068.69 |
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