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

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.