TL;DR: shorter amortization = higher payment, less interest expense. Longer amortization = lower payment, more interest expense. Max 25 years. Can go to 30 years if you have 20% down payment or more.

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The amortization period refers to how long it takes you to pay off your mortgage in full. The maximum time allowed for default insured mortgages is 25 years, and the maximum time allowed in Canada for uninsured mortgages is currently 30 years.

Mortgages with less than 20 percent down payment are considered high ratio mortgages and require borrowers to pay for mortgage default insurance. This is also called CMHC insurance and is there to protect the lender in the case the borrower stops paying the mortgage.

For mortgages with over 20 percent down payment, CMHC insurance is usually not needed. This also means that your amortization period could be up to 30 years. In turn, your monthly payments will be lower as you are paying for a longer period of time. However, you will end up paying more in interest. Here's an example:

Mortgage Amount: $400,000
Interest Rate: 2.99%
Amortization: 25 Years
Payment: $1,891/month
Total Interest: $167,279

Mortgage Amount: $400,000
Interest Rate: 2.99%
Amortization: 30 Years
Payment: $1,680/month
Total Interest: $204,902

The increased cash flow (lower payment) generated by the 30 year amortization vs 25 is about $211/month. That's noticeable. But it will cost you $37,000 more in interest charges in the long run. However, used wisely, a 30 year amortization has its uses.

Short vs long amortization

When it comes to amortization periods there are good reasons for each option. The benefits of a shorter amortization period are that you don’t need to have a big down payment, you pay less in interest, and your mortgage is paid off sooner. However, the drawback is that your mortgage payments will be more. 

Borrowers that are approved for longer amortization periods are able to make smaller mortgage payments over the life of the loan. However, to qualify home buyers will need to put down at least 20 percent for a down payment and will end up paying more in interest. 

Choosing a mortgage amortization period

Home buyers that are able to afford more than 20 percent for a down payment will be in a position to choose the length of their amortization. Most home buyers in Canada opt for a 25-year amortization period. 

Shortening your amortization period

Home buyers are not bound to the amortization period they choose. If you are in a position to pay your mortgage off earlier, you can. This is what is referred to as prepayment privileges and give you the opportunity to increase your monthly payments or put a lump sum towards it. It is important to be clear on what your prepayment privileges are because they will impact your total cost of borrowing over time.

Another way that borrowers have dealt with their amortization period is to pick a longer time and invest the money they save on mortgage payments each month. This helps home buyers earn a little extra over the course of their mortgage. 

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