Amortization Rules in Canada
Amortization is the total planned period for full repayment of a mortgage, including principal and interest. It should not be confused with the term, which is the period during which the mortgage contract and interest rate are in effect (typically 5 years). A loan can have a 25-year amortization and a 5-year term, meaning the borrower will renew their mortgage five times over the total duration. Strict rules govern maximum amortization in Canada, varying based on whether the loan is insured or conventional, with recent exceptions for first-time buyers.
Amortization by Loan Type
- Standard insured (under 20% down): maximum 25 years. This is the baseline rule for borrowers purchasing with less than 20% down.
- Insured for first-time buyers of new builds (since 2024): maximum 30 years. Exception introduced by the fédéral government to improve first-purchase affordability in new construction.
- Conventional (20%+ down): maximum 30 years at major banks and most institutional lenders.
- Private and alternative lenders: some offer 35 or 40 years, but at significantly higher rates with strict conditions. These products target borrowers who don't qualify at institutional lenders.
Strategic Considerations by Borrower Profile
Amortization choice should be personalized to each borrower's situation. For a young first-time buyer aged 25-35 with growing income, longer amortization (30 years) may be wise: lower monthly payments ease initial budget management, and prepayments can shorten effective amortization over time. For a 45-55 year old buyer, shorter amortization (20-25 years) is preferable to ensure payoff before retirement when income typically decreases. For a real estate investor, longer amortization maximizes monthly cash flow and the tax advantage of deductible interest (on rental properties).
The Effect of Prepayments on Amortization
Canadian mortgage contracts generally offer prepayment privileges that allow reducing effective amortization without refinancing. Typically, lenders allow increasing regular payments by 10% to 20% annually, making an annual lump-sum payment of 10% to 20% of the original balance, and doubling payments one or more times per year. By using these privileges strategically, a borrower with 30-year amortization can reduce effective amortization to 20-22 years, combining the flexibility of low monthly payments with the interest savings of shorter amortization.
Negative Amortization: A Risk to Monitor
During rapid rate increases, variable-rate mortgages with fixed payments (VRM) can see their amortization extend beyond the initial period. If monthly payments no longer fully cover interest, amortization extends and can even become negative (the loan balance increases instead of decreasing). This phenomenon affected many Canadian borrowers during the 2022-2023 rate hikes. The Canadian Mortgage Charter of 2023 now requires lenders to clearly communicate this situation and offer options to return to normal amortization.
The Broker's Role in Amortization Choice
Amortization and the Stress Test
Amortization choice directly interacts with the OSFI stress test (B-20). Longer amortization reduces the monthly payment calculated at the qualifying rate, which can help meet maximum GDS/TDS ratios and thus obtain a higher loan amount. For a conventional loan, choosing 30 years over 25 years increases borrowing capacity by approximately 8 to 10%, a significant difference for a Quebec household at the edge of their qualification.
Mortgage brokers should present clear comparative scenarios showing amortization choice impact on monthly payments and total loan cost. Explain the possibility of using prepayment privileges to shorten effective amortization while maintaining the security of lower monthly payments. Brokers should also inform clients that amortization can be modified at renewal (shortened or extended within regulatory limits) based on their evolving financial situation.