Mortgage Amortization: Comparing 15, 20, 25, and 30 Years

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Mortgage Amortization: Comparing 15, 20, 25, and 30 Years

The amortization period determines the number of years over which your mortgage will be fully repaid if you maintain your regular payments at the same pace. This parameter has a direct and significant impact on two key elements: the amount of your periodic payment and the total interest cost over the life of the loan. Understanding the trade-offs between these two factors is essential for choosing the amortization that matches your financial goals and payment capacity.

Comparison Table: $400,000 Mortgage at 5% Fixed Rate

15 years: monthly payment of approximately $3,164. Total interest of approximately $169,000. Total loan cost of approximately $569,000.
20 years: monthly payment of approximately $2,633. Total interest of approximately $232,000. Total loan cost of approximately $632,000.
25 years: monthly payment of approximately $2,326. Total interest of approximately $296,000. Total loan cost of approximately $696,000.
30 years: monthly payment of approximately $2,138. Total interest of approximately $373,000. Total loan cost of approximately $773,000.

Criteria for Choosing Your Amortization

Assess your payment capacity: Calculate the maximum amount you can comfortably allocate to your mortgage payment each month, taking into account your other financial obligations. OSFI recommends that the gross debt service ratio (GDS) not exceed 39% of gross income and that the total debt service ratio (TDS) not exceed 44%.
Define your financial goals: If your priority is to pay off your mortgage quickly and minimize interest, a short amortization (15-20 years) is preferable. If you want to maximize monthly cash flow for investing elsewhere or maintaining financial flexibility, a longer amortization may be appropriate.
Consider regulatory constraints: CMHC-insured mortgages are generally limited to 25 years of amortization. If your down payment is less than 20%, your choice may be limited, unless you qualify for special first-time homebuyer programs allowing 30 years.
Plan your use of prepayment privileges: You can consider selecting a longer amortization for minimal payment flexibility, then use prepayment privileges (lump-sum, payment increases) to accelerate repayment. This approach offers the security of a low minimum payment with the ability to repay as quickly as a short amortization.

The Long Amortization with Accelerated Repayment Strategy

A popular approach is to take a 25 or 30-year amortization to lock in a lower monthly payment, then actively use prepayment privileges to reduce the effective amortization to 15-20 years. This strategy provides a safety net: if your financial situation temporarily deteriorates, you can revert to the minimum payment without breaking your contract. On the other hand, it requires the discipline of regularly contributing extra amounts. In Quebec, an AMF-certified mortgage broker can model both scenarios (short fixed amortization vs. long amortization with accelerated repayments) and show you comparative results in terms of total cost, flexibility, and risk.

Frequently Asked Questions

What is the maximum amortization period in Canada?

For CMHC-insured mortgages (less than 20% down payment), the standard maximum amortization is 25 years. However, certain first-time homebuyer programs allow 30-year amortization even with an insured mortgage. For conventional uninsured mortgages (20% or more down payment), most lenders offer up to 30 years. Some alternative lenders may go up to 35 years in specific cases.

How much more interest will I pay with a 30-year amortization instead of 25 years?

On a $400,000 mortgage at 5%, a 25-year amortization costs approximately $296,000 in total interest, while a 30-year amortization costs approximately $373,000. The difference is about $77,000 in additional interest. The monthly payment goes from $2,326 (25 years) to $2,138 (30 years), a reduction of only $188 per month for an extra cost of $77,000.

Does a shorter amortization help get a better rate?

Not directly. In Canada, the mortgage interest rate is primarily determined by the chosen term (fixed or variable), loan type (insured or conventional), and the borrower's risk profile. Amortization length generally does not affect the offered rate. However, a shorter amortization reduces risk for the lender, which may be a favorable factor in the overall file assessment.

Is it possible to change the amortization during the term?

Modifying amortization during the term is generally limited. Some lenders allow it for a fee or as part of a refinance. The simplest strategy is to use prepayment privileges (lump-sum or payment increases) to effectively reduce amortization without modifying the contract. At renewal, you can consider selecting a new amortization in agreement with your lender.

Is it better to take a longer amortization and invest the difference?

This is a frequently debated strategy. Mathematically, if your after-tax investment return exceeds your mortgage rate, extending amortization and investing the difference can be profitable. In practice, this requires the discipline to systematically invest the difference and tolerate market risk. Additionally, mortgage interest is not tax-deductible on a principal residence in Canada, unlike in some other countries.