Mortgages & Financing
First-Time Homebuyers
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25 vs 30-Year Amortization: Which works best for you, and how to save
What does amortization mean, anyway? You hear it all the time, yet you don't really know what it means until you're in the thick of the homebuying process. Here, we outline exactly what you need to know before mortgage shopping and deciding what's best for you.
Niamh GyulayContent Marketing Specialist @ Pine
5 min read
Have you been intimidated by all the finance-speak that no one prepared you for when you first bought a home? You’re not alone. There’s a lot of jargon that gets tossed around when signing a mortgage, but one term is the most important when understanding your long-term wealth journey: amortization. It sounds scary, but put simply, it is the concept that dictates how your money is divided every month.
What is mortgage amortization?
Mortgage amortization is the process of paying off your home loan over time through regular payments. In the specific context of mortgages, it’s the path that takes your total loan down to zero.
Your amortization period is the total number of years it will take to pay off your mortgage in full, usually 25 or 30 years in Canada.
An amortization schedule is a table that shows every payment you will make over the life of your entire loan, and each payment is split into two parts: interest (the price you pay for borrowing the money; the part the bank keeps) and the principal (the actual balance of your loan, the money you actually borrowed; in other words, your equity.)
When you’re in the first couple of years of your homeownership journey, you may notice that although you’re consistently making big payments on your mortgage, the balance seems to barely move. This is due to what we call the “front loading” effect, where mortgage amortization is front-loaded with interest.
Because interest is calculated by your total remaining balance, your first few years of payments are mostly interest. As you pay down the principal, the amount of your monthly payment that goes towards interest shrinks. In the last few years of your mortgage, basically your entire payment goes towards paying down the principal.
Amortization period vs mortgage term: What’s the difference?
It’s easy to confuse these two terms, but they serve very different purposes:
Amortization Period is the total length of time it will take to pay off the mortgage in full, usually either 25 or 30 years. This determines the monthly payment amount.
Mortgage Term is the length of your current legal contract with your lender, usually 3-5 years. At the end of each term, you must renew your mortgage at the current market rates.
For example, you may have a 25-year amortization with a 5-year mortgage term. After five years, you must renew your mortgage, but you still have 20 years left on your amortization schedule.
25-year vs 30-year amortization in Canada
One of the most common searches is: 25 or 30-year amortization?
Here’s the difference:
25-year amortization: Higher monthly payments, less total interest paid
30-year amortization: Lower monthly payments, more total interest paid
A longer amortization reduces your monthly mortgage payment, which can help with cash flow. But you will pay more interest over time. The right choice depends on your financial goals, whether you want lower payments now or to become mortgage-free sooner.
What happens over your whole amortization period?
Early Years: The Equity Climb (Years 1-5) During your first five year term, you’re essentially “renting” the money from the bank. Your primary goal in these early years is consistent payments. However, you’ll want to make as many small “lump sum” payments as possible, as they skip the interest queue and go straight towards the principal. Remember, as the principal gets smaller, the lower the portion of your payments that go to interest are.
Middle Years: The Tipping Point (Years 12-13 of 25, 14-15 of 30) About halfway through your amortization period, you will hit the tipping point, when your monthly payment finally applies more money to your principal than to the bank’s interest.
Final Years: The Home Stretch (last 5 years) In the final five years of your amortization period, your payments and schedule will work in your favour. Debt disappears rapidly, and the “forced savings” of your mortgage payments accelerate your net worth, setting you up for your next big stage of life.
How to Pay Off Your Mortgage Faster (And Save on Interest)
Nothing says you must stick to your lender’s pre-determined schedule. By shortening your journey, you could save thousands.
Switching to accelerated bi-weekly payments: This adds one extra full payment per month. Not everyone is able to do this, but if you can, that is an excellent way to speed up your life cycle in your amortization schedule.
Making annual lump sum payments: Most lenders will allow you to pay 10-15% of the original principal annually without penalty (read: this payment will skip the interest queue).
Increasing your payment: Even adding $50/mo directly to the principal can save years off your timeline.
Before making changes, always check your mortgage prepayment privileges.
Understanding your amortization schedule is the difference between having debt and building wealth by investment. By understanding how your payments are split, you can make informed decisions about when to pay more and how to reach the finish line faster. If you’re unsure what your mortgage allows, Pine can review your current mortgage and help you understand your options.