Amortization: What is it and how can you pay your mortgage off faster?

How long do you want to take to pay your mortgage off?

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November 21, 2022
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While you may not be able to negotiate the interest rate of your mortgage, you can choose how many years it’ll take you to pay it off–sort of. 

What is an amortization?

The easiest way to describe an amortization period is to think of it in two parts: the total amortization period and the mortgage term. 

When it comes to your mortgage, your amortization period refers to the number of years it takes to pay your mortgage off in full. While this number can go up to 30 years maximum, it’s important to note, though, that if you can only provide less than a 20% down payment, your amortization period caps at 25 years. 

The mortgage term, on the other hand, is the length of time that your mortgage contract is in place. Generally, when you apply for a mortgage, you agree to a mortgage term period–anywhere from months to years, but usually up to five years–at the current interest rate you’re at. 

At the end of each term you can renew for another term, move to another financial institution with a new mortgage, or pay your mortgage in full. 

You can also continue to renew your existing mortgage terms until you pay off your mortgage in full. 

How does amortization work? 

When it comes to your mortgage payment, regardless if you have a fixed or variable-rate mortgage, the payments are usually paying towards two things: your principal and your interest. 

The more money you can put toward your principal, the shorter your amortization will be–which means you’ll pay your mortgage off faster. The flip side to this, though, is that generally a shorter amortization period might mean you have larger monthly mortgage payments in order to cover the principal costs in a shorter amount of time.

Amortization when you’re on a fixed-rate mortgage

If you happen to have locked in your mortgage at a fixed rate with an amortization period of 25 years, you’ll pay off your loan in that set amount of time. The good thing about a fixed-rate mortgage is that payments won’t change on a month-by-month basis–unless your property taxes or home insurance costs increase. 

Amortization when you’re on an adjustable-rate mortgage

Just like a fixed-rate mortgage, amortization with adjustable-rate loans means the same set amount of time. It’s still the period of time you’ve chosen to pay off your mortgage in full. The main difference in this situation is that given a variable rate can fluctuate based on Canada’s prime rate, your monthly mortgage payments might vary over time.

Amortization when you’re on a variable-rate mortgage

Unlike an adjustable-rate mortgage, when interest rates increase or decrease, monthly mortgage payments on a variable-rate mortgage always stay the same. However, if interest rates go up, the part of your monthly payment that goes towards your interest rate vs. your principal can also change in conjunction. In these situations, too much of an interest rate increase could make you hit your trigger rate, which ultimately could lead to changes in your mortgage situation, like an increase in the amount of time it takes you to pay off your mortgage in full. 

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While you may not be able to negotiate the interest rate of your mortgage, you can choose how many years it’ll take you to pay it off–sort of.

Five ways to shorten your amortization period 

For many–if not most individuals–being mortgage-free is the dream. But if you’ve picked a 25-year or 30-year amortization period, that doesn’t mean you have to wait that long to pay it all off. Over time, there are a couple ways to shorten your amortization period to help you get to a retirement space at a faster rate. 

  • Offer a larger down payment: Although it’s important not to completely tap into all your savings, offering up a larger down payment means you’ll be borrowing less of a mortgage making it easier to pay it off, while also saving you thousands in interest.
  • Make bi-weekly payments: If your lender can offer you an accelerated bi-weekly payment option, you’ll make one extra payment a year which can help shorten your amortization period. 
  • Leave your payment the same if you renew your term at a lower rate: If you happen to renew your mortgage at the end of the term with a lower rate, you could definitely celebrate a lower monthly mortgage payment–or you could keep your payments the same, to get mortgage-free sooner. 
  • Make a lump sum payment: Depending on your mortgage, you may also have the ability to offer up a lump sum either before the end of your term, at the end of your term, throughout your term, or on certain dates throughout your contract.  It’s important to read through your mortgage contract terms to understand what you’re able to do. 

Should you choose a longer or shorter amortization period?

The answer depends on  your financial situation and budget. With a shorter amortization period, you will be making larger monthly mortgage payments, but you will save on interest. On the flip side, you can take a longer amortization period so your monthly mortgage payments are lower. 

Can you extend the mortgage amortization period if necessary?

If for whatever reason you might want to extend your amortization period–in an effort to maybe lower your monthly mortgage payments–you can. However it’s important to note that doing this will be treated as a new application and you’ll have to qualify for a mortgage all over again. 

But if you ever have any questions about amortization or finding the right option for you, feel free to connect with one of Pine’s mortgage advisors. They’re happy to help guide you through the homeownership journey.