Your Mortgage Basics

What is amortization?

Amortization is how long it will take to pay your mortgage in full. Term refers to the length of a mortgage contract provided by a lender. The total length of a mortgage is usually made up of several terms. For example, a lender may offer a 5-year term though it may take 25 years to pay your mortgage completely.

Shorter Amortization:

• Less time to pay off your mortgage
• Less interest paid overall
• Higher mortgage payments

Longer Amortization:

• More time to pay off your mortgage
• More interest paid overall
• Lower mortgage payments

Sample Amortization Table

Imagine borrowing $200,000 at 7.0% interest on a fixed term with monthly payments.³ This is how amortization could affect you:

These results are based on the above example as well as a number of assumptions. While care is taken in the preparation of this illustration, no warranty can be made as to its accuracy or applicability for any particular case.

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What does term mean?

The length of the current mortgage agreement. A mortgage may be amortized over a long period (such as 30 years)⁵ with a shorter term (six months to five years or more). After the term expires, the balance of the principal owed on the mortgage can be repaid or a new mortgage agreement can be entered into at the current interest rates.

What’s the difference between fixed and variable interest rates?

Fixed Rate mortgage: Your interest rate and mortgage payments remain the same throughout the term. This means you’ll know exactly how much you’ll still owe at the end of every term.⁶

Variable Rate mortgage: Your interest rate changes with BMO’s prime rate while your mortgage payments remain the same throughout the term. This means that if interest rates fall, more of your mortgage payment is applied to the principal. If interest rates increase, more of your payment will go towards interest.

It’s important to note that interest rate fluctuations may also affect your amortization period (number of years required to pay off the mortgage), and if a rate increase results in a longer amortization period, your payments may have to increase.

What’s the difference between open or closed mortgages?

Open mortgage: You can repay all or part of your mortgage at any time without a prepayment charge. This means you can pay off your mortgage faster, but your interest rates may be higher than on a closed mortgage.

Closed mortgage: You have fixed payments for a significant period of time, but your prepayment options are limited. This means that your interest rate is usually lower than on an open mortgage. If you wish to make a lump sum, you may be limited as to how much you can prepay without a prepayment charge being applied.

How do I set a payment schedule?

Another important decision is setting your mortgage payment frequency. Traditionally, mortgage payments are made every month. But there can be significant benefits to paying more frequently, especially if you choose an accelerated bi-weekly or weekly option.

With more frequent and accelerated payments, you pay a little more each month, but you’ll benefit by paying down your mortgage faster and saving interest costs over the long term.

Just look at the difference those two extra payments can make:

(Based on borrowing $200,000 at 7.0% interest on a fixed term with different payment frequencies for a 25-year amortization.³)