Term vs. Amortization: Why Your Payment Can Change at Renewal

Two clocks running at once

Ask most homeowners how long their mortgage is and they will give you one number. Lenders have two, and they mean different things.

The Financial Consumer Agency of Canada puts it simply on its mortgage terms and amortization page: the mortgage term is the time your mortgage contract is in effect, and amortization is the time it takes to pay your mortgage. Terms commonly run from a few months to five years or more. Amortization is typically 25 years, and sometimes 30.

FCAC adds that the amortization figure is an estimate based on the interest cost of your current term. When your term ends and the pricing changes, the estimate changes with it.

How long can the amortization be?

Per FCAC, when your down payment is under 20% of the home's price, the maximum amortization is 30 years for first-time buyers or purchasers of a new build, and 25 years in all other cases. With more than 20% down, the lender sets the maximum. Rules like these have changed before, so confirm what applies to your file; our piece on longer amortizations on CMHC-insured mortgages covers the recent shift.

What a longer amortization really costs

A longer amortization lowers your payment, and you pay more interest in total. FCAC's page shows the trade-off with a $300,000 mortgage at 4%: total interest of $63,919 over 10 years versus $173,418 over 25 years.

We checked that arithmetic using Canadian semi-annual compounding for a fixed mortgage, and it reproduces FCAC's figures: about $3,033 a month over 10 years and about $1,578 a month over 25. The difference is the whole story. The 25-year payment is roughly half, but the interest bill is nearly triple.

An illustration: what happens at renewal

Here is a simple example. It is illustrative only, using the semi-annual compounding Canadian fixed mortgages follow. It is not an offer, a forecast or advice.

• The start: $500,000, 25-year amortization, five-year fixed term at an illustrative 4.50%. Payment: about $2,767 a month.
• After five years: about $438,980 is still owing. The amortization has 20 years left.
• Renewal at the same 4.50%, 20 years left: payment stays about $2,767.
• Renewal at an illustrative 5.50%, 20 years left: about $3,004 a month, roughly $237 more.
• Same 5.50%, amortization reset to 25 years: about $2,680 a month, below where you started, but with five more years of payments ahead of you.

Two things moved the payment: the new term's pricing and the amortization you chose to keep. Your lender may offer to reset the clock to lower the payment. That can be a useful tool if cash flow is tight, and our article on extending your amortization at renewal shows the full cost. It is a decision to make with the total interest in view, not only the monthly figure.

Choosing a term and an amortization on purpose

• Shorter terms bring you back to the renewal table sooner. That adds flexibility and also exposes you to pricing at that time. See what to weigh with a shorter term.
• Longer terms fix your pricing for longer and usually mean a larger penalty if you break the contract early. Our Penalty Protector Pro page explains how those penalties are worked out.
• Prepayments shorten the real amortization without changing the contract. Check your privileges first.
• Run it before you sign. The mortgage calculators let you compare terms and amortizations side by side.