Encyclopedia
Amortization
The length of time it would take to pay off a mortgage in full with regular payments. It's usually longer than the term, which is how long the current deal with the lender lasts.
For example: A buyer of a small warehouse compares two lender offers with the same term but different amortizations, and sees how much the payment changes. (Illustration only, not a real deal.)
This is a general industry term with no single official definition. Your lease or contract wording controls.
Example only, not a real client. Say you are financing a building and two lenders offer the same rate, but one amortizes over 25 years and the other over 20. The longer one gives lower monthly payments, which helps your coverage ratio, though you pay down the loan more slowly. You choose based on your cash flow and how long you plan to hold.
What I’d tell a friend
Look at the amortization as well as the rate. It changes your monthly payment, your coverage ratio and how much you still owe when the term ends.
Why it matters to you
It sets your monthly payment. A longer amortization makes the payment easier to carry but leaves more owing at renewal, which matters if rates are higher or the property is worth less when the term ends.
How to use it in your deal
Borrowers should match amortization to the property's life and cash flow. Older buildings may get shorter amortization from lenders. Compare payments and total interest under different options, and check whether the lender allows extra payments without penalty. Remember amortization is not the term: you'll renew several times before the loan is paid off, at whatever rates apply then.
Buyers analyzing deals should use realistic amortization in cash flow. Owners can shorten amortization at renewal if cash flow allows, building equity faster. Lenders set limits based on property type, age and risk; Canada Mortgage and Housing Corporation (CMHC)-insured multi-family loans may allow longer periods. Ask the lender whether you can change the amortization at renewal, and what that would cost. Ask the lender how a longer amortization changes the payment and the total interest.
Mistakes I see
Confusing amortization with term. Assuming the longest is always best. Ignoring renewal risk.
In BC and Vancouver
Lenders set amortization; CMHC sets terms for insured multi-family loans.
Official sources: Canada Mortgage and Housing Corporation · Bank of Canada: key interest rates
Amortization versus term
Amortization is the length of time it would take to pay off the loan in full with regular payments. The term is how long the current loan agreement lasts before it must be renewed or refinanced.
A commercial loan often has a term much shorter than its amortization, so a balance is still owing when the term ends. Plan for that renewal from the start.
How it affects your plan
A longer amortization lowers payments and can make a deal work on paper, but you build equity more slowly and pay more interest over time.
Ask your lender what amortization it offers for your property type, and run your numbers both ways before you commit.
Questions to ask before you sign
- What amortization is available?
- How do payments compare?
- Can I prepay?
- What happens at renewal?
- Does the building's age limit it?
Keep reading
Related terms: Term (loan), Interest-only loan, Debt service coverage ratio (DSCR)
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General information for British Columbia only. It isn’t legal, tax, accounting or financial advice, laws and rates change, and reading it doesn’t make you my client. Any numbers or scenarios are hypothetical. Check the linked official source and talk to a lawyer, accountant or other qualified professional before you act or sign anything. See the terms and disclaimer.