What’s the best ammortization period?

Question: Does the “amortization” affect anything other than the minimum payment required? A very well educated friend of mine advised me that in general one should always take the longest amortization period offered by the bank (30 years if you can get it). Then make sure that there is a generous prepayment clause and use it. You’ll save way more than if you were to have chosen a shorter amortization, yet made the same payments. I haven’t been able perform the calculation that would prove it. Take two scenarios, where we vary only the amortization, what will be the outstanding principle at the end of the term and can you show the math that proves it?

The assumptions are a principal of $125,000, interest rate 3.5%, a five-year term and a monthly payment of $1,000. What happens with an amortization of 25 years and 15 years? – B.W.


The logic in your friend’s comments escapes me. In fact, the contrary is true, the shorter the amortization period, the less the bank gets because the interest you pay over the life of the mortgage is greatly reduced. Of course, prepayments are always a good idea at any time.

I used the Royal Bank’s Morage Calculator to run your sample numbers. If you were to take a standard mortgage with a 25 year amortization, your monthly payment at the interest rate you indicate is $624.10. By the time the mortgage is paid off, you will pay total interest of $62,224.

If you increase the payment to $1,000 a month, you cut the amortization period to 13 years. Total interest paid to the bank will be less than half of the 25-year total, coming in at $30,405.

A 15-year amortization produces a monthly payment of $892.06 and total interest charges over the life of the mortgage of $35,569. Again, by increasing to $1,000 a month, you reduce the time to pay off the mortgage to 13 years and save another $5,000 in interest costs. – G.P.