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Guide: What is a mortgage amortization period and how does it work?

The mortgage amortization period is a vital aspect of your mortgage payment schedule. As a homeowner it’s important that you fully understand the details of your amortization period before entering your mortgage contract. At first the term ‘amortization’ may seem slightly complicated however that is far from true.

It is a simple concept that is easy to understand, and it’s a term that ideally should be a part of every homeowner’s vocabulary. The information below will simplify the term, and help you understand it better within the context of mortgage payments.

Mortgage broker discussing mortgage amortization with new home buyers.

What is Mortgage Amortization?

In simple terms, a loan amortization period refers to length of time required to repay a loan in full, including the interest and principal. The loan principal and interest are paid based on an amortization schedule, usually in the form of monthly installments.

In the context of a mortgage, the amortization period refers to the total time it would take for you to pay off that mortgage amount in full. This is also based on an amortization schedule that divides your mortgage amount into monthly installments. For example, if you have a mortgage amount of $50,000 that would take you 12 years to pay off in full, your amortization period would also be 12 years.

For how long should I have my mortgage amortized?

The length of your amortization period should be decided based on two key factors:

  1. The asset being financed- this is closely related to the ‘useful life’ of an asset which is essentially the number of years it will remain profitable for. So, for a house, useful life can be determined by the age, upkeep, and location of the property.
  2. Cash flow- Even though it’s tempting to pay back a loan as early as possible, doing so restricts cash flow, limits your flexibility and hinders your ability to reinvest in other ventures. As such, be sure to avoid choosing an amortization period that is too short as it will leave you strapped for cash and may cause stress to keep up with the monthly payments.

Nabil Jaffer the Manager of Major Accounts at the Business Development Bank of Canada (BDC) stated, “If you think about your home, you don’t want to pay your home mortgage back in three years because the payments would be so high, you’d never be able to live there”. (Amortization Period) This is a good way to think about your mortgage amortization period.

Is it important to shop for amortization periods?

Banks and lenders all offer different amortization periods and rates. Certain lenders may cap their amortization period at 20 years for a mortgage. However, there will always be lenders who will offer the desired 25-year loan amortization period.

Therefore, with the number of options you have available it is important to look around to find the best solution for you. Mortgage Maestro can help you with finding the right mortgage solution for you. Our financial advice is unbiased and free of external influence. As such, we can carry out the due diligence for you and have a professional mortgage agent provide you with the options that best fit your financial needs.

How is it calculated?

The amortization period is calculated using a table known as a loan amortization schedule, which considers the amount of the loan, the interest rate on the loan and, the frequency of payments. It highlights your monthly principal and interest payments over the lifespan of the loan. Additionally, you can use a mortgage amortization calculator which can be found on the websites of most financial institutions that offer mortgages. This will give you an idea of what your amortization period will look like.

How Mortgage Maestro can help

Mortgage Maestro can guide you through the process of finding the right mortgage solution for you including a suitable amortization period for your mortgage. We offer unbiased financial advice with the sole intention of offering you the best service and providing you with a solution catered towards your financial goals.

Contact us today and we’ll have a professional mortgage agent assigned to you immediately. Our team of experienced mortgage professionals are willing and able to answer all of your questions regarding your mortgage options including the right amortization period for you.

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