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Updated 2mo ago.
Updated 2mo ago.
Amortization refers to the process of spreading a debt repayment (principal + interest) over a set period through regular payments. In Canada, the term is primarily used for mortgages, where the amortization period (often 25 or 30 years) determines the payment amount.
You buy a $500,000 home with a $100,000 down payment (20%). Your mortgage is $400,000 with a 25-year amortization and a 5-year fixed rate of 5%. Your monthly payment is approximately $2,326. At the start, about $1,650 goes to interest and only $676 to principal. After 10 years, the proportion gradually reverses. If you choose a 30-year amortization, your payment drops to $2,138/month, but you will pay $68,000 more in total interest.
The choice of amortization period has a major impact on your finances. A shorter amortization (20 years vs 25 years) means higher payments but much less total interest paid. Conversely, a longer amortization reduces monthly payments, freeing up cash to invest — for example in a TFSA or RRSP. The right strategy depends on your mortgage rate versus the expected return on your investments.