The amortization period is the time required to repay a mortgage or loan in full, based on regular payments at a certain interest rate. The length of your amortization period can impact the amount of interest you pay over the loan’s lifetime.
The key parts of a loan
There are two parts to a loan payment: some goes to repay the principal (the amount borrowed), and some is interest (the cost you pay to borrow the money).
There are two key time periods in a mortgage or loan:
The term of the loan is the length of time that your agreed interest rate is in effect (i.e. you may renew your mortgage for a five-year term at a 6% fixed interest rate).
The amortization period is the amount of time it should take an individual to pay off their loan in full, based on their current interest rate and payment schedule.
Understanding your amortization schedule
An amortization schedule shows the amount that will remain owing in the future and sets out how much of each payment is allocated to the interest and principal. This information is key for managing your loan or mortgage.
Consider the following:
Longer amortization periods reduce your monthly payments, since you are repaying your loan over a greater number of years. However, you will pay more interest over the life of the mortgage.
It may be beneficial to choose the shortest amortization period that you can afford. If you repay the mortgage or loan quickly, you can significantly reduce the amount of interest you pay. Making extra payments, especially in the first few years of a loan, that go directly to the principal is a good way to shorten the length of the loan and decrease the cost of interest.
You owe more money at the start of your loan, meaning that more of your early payments cover the interest portion, not the principal. Using an amortization schedule can help you predict how much you will owe in the future.