You may have heard the word “amortization” thrown around in the financial world. The definition of amortization is the act of paying off debt in regular installments over a period of time. It applies directly to your mortgage! Why you ask? Simple, because the amortization of a mortgage refers to the total number of years required to pay back the entire borrowed amount.
Until recently, in Canada, the longest amortization period on a mortgage was 25 years. Now, some lenders offer an amortization of up to 40 years. Some people prefer a longer amortization period to ensure smaller mortgage payments. However, it can be to your advantage to choose the shortest amortization that you can afford because in the long run, you will save thousands of dollars in interest. (More on that later.)
The amortization on your mortgage is divided up into smaller time periods. These are known as “terms”. Mortgage terms can range from 6 months to 5 years. There are some institutions that offer 7 or 10 year terms but the most common term is 5 years. During the term, if you have a fixed-rate mortgage, the interest rate and payment amount remain the same. With a variable rate mortgage your payment may change. Your agreement will indicate when payments are due to change. Regardless of whether your mortgage is fixed or variable you have the right to renew at the end of your term creating a new term and possibly better interest rates.
For the most part, the longer your term, the higher your interest rate. This is due to the fact that it is impossible to know what interest rates will be over any given period of time. Many choose the certainty of a longer term with fixed-interest rates. This ensures they will know in advance how much they will have to pay for their mortgage.
Most lenders offer different payment options. These options may all seem the same but upon closer inspection some payment methods offer greater savings in interest charges. Here are the payment methods:
Monthly: funds are taken from your account on a specific day, once a month or 12 times per year.
Semi-monthly: half of your monthly payment amount will be taken from your account twice a month, resulting in 24 semi-monthly payments per year.
Bi-Weekly (non-accelerated): payments are made every second week resulting in 26 payments per year (because there are 52 weeks in a year).
Weekly (non-accelerated): payments are made every week resulting in 52 payments per year.
Accelerated bi-weekly: this type of payment allows you to make half of your monthly payment every 2 weeks resulting in 26 payments per year. By doing this you make the equivalent of one extra monthly payment which means you pay off your mortgage faster.
Accelerated weekly: one quarter of your monthly payment amount will be debited from your account every week resulting in 52 payments. The same as with accelerated bi-weekly payments, you are making the equivalent of one extra monthly payment per year and paying off your mortgage faster.