A guide for home buyers

Chapter 5 – Term vs Amortization

It’s quite common for borrowers to confuse amortization and term.

Amortization is the number of years it takes to pay off your entire mortgage. Term is the length of your contract. When your term is up, you can change your mortgage amount, amortization, and interest rate.

Choosing a longer amortization reduces your monthly payment and therefore increases how much you can borrow. Longer amortization periods also end up accruing more interest, so you have to judge if the lower monthly payments and larger mortgage amount are worth the extra cost.

The maximum amortization is for hi-ratio mortgages is 25 years. For conventional mortgages, the majority of lenders will allow 30 year amortizations. Most first time home buyers end up using the maximum amortization allowable.

Choosing your mortgage term is a little more complicated. Terms can be anywhere from 6 months to 10 years. The most common term is 5 years, which is also the easiest to qualify for. You should speak with a broker to decide which term is the best deal.