A Fundamental Question

Amortization ScheduleWhat is your level of knowledge with the following term: amortization?

  1. very familiar
  2. somewhat familiar
  3. not very familiar
  4. not at all familiar

In 2013 BMO posed this question to Canadians across the country. The results were noteworthy.

Over half of Canadians (52%) were not even somewhat familiar with the word “amortization.”

That’s fairly remarkable given that almost 70% of households are homeowners–most of whom have had a mortgage.

Should people even be allowed to enter a mortgage if they don’t comprehend “amortization?” I say that partially tongue-in-cheek, but it’s sort of like managing your own stock portfolio and not knowing what “dividend yield” means. Maybe every mortgage application should include this as a skill-testing question.

The issue is fundamental. If someone doesn’t understand amortization, he/she may not know how to minimize it. That has implications for their interest paid, equity and retirement. (Mind you, some will know the concept of amortization but not know what it’s called.)

It’s certainly a good question to ask mortgage clients during an initial consultation, and especially first-time homebuyers. We sometimes do a disservice to borrowers when we take for granted what they do and don’t know. You can imagine how many of those aforementioned 52% also don’t understand IRD penalties, blending, porting and so on…


Rob McLister, CMT

  1. It’s a loaded question. You’re asking people the definition of a word, not if they are aware of the idea that the word means.
    It’s like asking them if they know what PSI is, instead of asking them if they understand what water pressure is.

  2. Hi Trevor, For some people you’re right. It might have been more telling if BMO/Pollara phrased the question to judge how many people understand the concept of amortization.
    That said, it’s nonetheless noteworthy that 70% of us are homeowners (almost all of whom have had mortgages) but 52% of us still aren’t meaningfully familiar with “amortization.” There’s likely a high correlation between knowing the word and fully understanding amortization costs and amortization reduction strategies. For that reason, there’s an important takeaway here about financial literacy.
    Cheers…

  3. To some extent the word “amortization” is in part financial jargon. We use it everyday.We understand what it means, the implication & impacts of increasing or decreasing it. I would also suggest that most mortgage professionals did not truly understand the totality of the word amortization until they entered the mortgage industry.
    If we were to do the same poll, asked the same question, of the same people but used the the words “frontal lobe” instead of “amortization” the results of the poll would be similar…and EVERYBODY has a frontal lobe, and without it you would not have memory, motor skills or personality….you may not know what a frontal lobe is or does, but you would expect your doctor to understand it completely.
    This poll is just BMO using an ” independent poll” as a marketing tool to position themselves to be the “knowledgeable ones” able to provide all the answers you, the “ignorant consumer”, may have about mortgages.
    …and I would not give any numbers generated by this poll, one iota of credibility.

  4. Ah dah…. when I discuss a mortgage with a client I rarely use the word. I talk about how long it will take them to pay off their mortgage, similarly the word term, don’t use that one either. I know some people like to throw out a lot of terms to show how smart they are but why not talk in a language clients understand. So my opinion of BMO is they are typical bankers who really don’t understand how to relate to their clients.

  5. How silly and irresponsible it is to avoid one of the most common mortgage words when educating a client. The word amortization is on every other page of the paperwork that clients sign! It’s in the news every week when they’re talking about changing amortizations. Someone borrowing hundreds of thousands of dollars needs to know what it means. Stop trying to dumb things down and give people some credit!

  6. The typical home owner is not a financial guru, probably does not pay too much attention to the business pages and cares more that the appliances are stainless steel than learning mortgage terminology. By talking in simple terms, people can understand what effects them and their mortgage. They need to understand that not the definition of mortgage terms. Some people like to learn financial stuff and that is fine but most fear it and the only way to make them understand things is to talk in simple terms. Maybe if banks dumbed things down and explained the problem with taking too long to pay off debt people would have less “credit”.

  7. I am not surprised at all! Although a mortgage broker/advisor has a responsibility of educating the client, it is nearly impossible to explain all the fundamentals of mortgages and credit, let alone having the client understand it overnight. Society lacks this education in general. Schools do a poor job in educating students what the real world is all about. If simple credit or finance programs were integrated at an early stage, our population would be much wiser. Rest assured, my children will be getting this essential life lesson – by me!

  8. If you have a mortgage you should know what amortization means. Its not like trying to understand the house price index, the meaning of “amortization” is easy to comprehend for anyone.

  9. Wow, that’s really unbelievable! I don’t even know what to say, really because it is just so outrageous. Even if they know the concept but don’t know the actual word, that’s ridiculous. You hear it all the time when applying for a mortgage application, you hear it all the time when just looking at houses, and you hear it all the time when you’re closing. Seriously, how can so many people not even be remotely familiar with this term?!?!?!

  10. It’s the concept that’s important, not the wording. If your toilet springs a leak, you don’t have to know you need to replace the ballcock. All you need to know is what it does. I can never remember which screwdriver the Phillips is. Doesn’t mean I can’t hang a picture frame on the wall.

  11. Last time I looked the average mortgage was $170,000, a hair more than your typical ballcock?
    I think this separation of terminology and concept diverts from the point. People who don’t know the word amortization probably don’t appreciate the concept either.
    P.S. Do you really know what a ballcock is but don’t know which screwdriver is the Phillips? I hope you never have to screw your toilet.

  12. People’s level of knowledge depends mostly of their willing to know :)
    Good news for the banks I guess that people don’t care to know details, but just pay.

  13. I’ll wager you know nothing about this poll and it’s numbers. Guys like you and Mortgage Guy who bash banks with no cause just make your whole broker profession look bad.

  14. I disagree with you. They didn’t ask people to define the word. Per the story the question was “What is your level of knowledge with the following term: amortization?”

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