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Canadian Financial, Real Estate and Mortgage Glossary

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Amortization


Synonyms:amount, pay-off, remuneration, repayment, settlement, sum
Filed Under: financial-banking, mortgages
Tags: banking, lending, loan, mortgage, rates
 

Definition of amortization

amortization
1. The process of gradually paying down the principal of the loan. As each payment toward principal is made, the mortgage amount is reduced or amortized by that amount. This is in contrast to an interest-only payment where the principal balance is never reduced. The normal amortization period for a mortgage in Canada is 25 years, but can be as short as 5 years.

Amortization is the process of gradually paying off your mortgage. Likewise, an amortization period is the length of time required to completely pay off your mortgage loan.

When you apply for a mortgage you will be asked to choose an amortization period. As of March 18, 2011, the Government of Canada says that amortization periods can be up to a maximum of 30 years, but there's no minimum in length. However, mortgages are always broken up into individual mortgage terms, so there are practical minimums for the lengths of amortization periods.

In general, longer amortization periods result in lower monthly payments. However, longer amortizations also result in a greater amount of interest paid over time, as the mortgage's principal amount accrues interest for a larger amount of time.


Related Terms and Acronyms:

  • conventional mortgage   A mortgage that is not insured or guaranteed by CMHC or GE Capital.
  • fixed rate mortgage (FRM)   A loan in which the interest rate and payments remain the same for the entire life of the loan. The interest rate and payment amounts are set at the time of loan origination.
  • interest rate (IR)   The rate a lender charges an individual to borrow money.
  • mortgage calculator   A program that calculates the costs involved in a mortgage or determines what kind of mortgage a person can qualify for.
      ➥  CanEquity's mortgage calculator has been rated number one by the Globe and Mail.
  • mortgage renewal   A renewal as it pertains to the mortgage industry is defined as having an existing mortgage term end and signing a new term to continue.
  • pre-computed loan   With a pre-computed loan, the interest owed over the life of the loan is calculated using a standard amortization table. After signing for this type of vehicle loan, the borrower is obligated to pay back principal plus the full amount of interest that will accrue over the entire term of the loan.
  • pre-payment   Applying additional payments towards the balance of a mortgage loan.
  • reverse mortgage   A loan that allows an older homeowner to convert built-up equity into cash. The loan comes due when the owner dies, sells the house or moves out.
  • simple interest (SI)   Interest computed only on the principal balance, without compounding.
  • variable rate mortgage (VRM)   Home loan in which the interest rate is changed periodically based on a standard financial index. Also called an "Adjustable-rate Mortgage."
      ➥  A type of mortgage loan offered by brokers and lenders.

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