When you’re looking to get a mortgage, you’ll need to consider many different elements of the loan. These include the interest rate, whether the mortgage is fixed vs. variable, the amortization period, and the term.
In this article, we’ll go over some basics of mortgage terms so that when you decide to buy a house or change your term, you’ll be well informed.
What is a mortgage term?
Your mortgage term is the length of time your mortgage contract is in effect. It also explains your contract outlines and the interest rate applicable for the tenure. Mortgage terms could be as short as a few months or as long as five years or more.
Reaching the end of your mortgage term implies that the contract is up for renewal. You might renew it for multiple terms to fully pay back what you had borrowed.
Another important term that you should know is mortgage amortization. Different from your mortgage term, an amortization period is the number of years it will take you to pay off a mortgage in its entirety, based on the interest rate applicable.
The maximum amortization period offered in Canada is 25 years, though in recent months, there has been a trend of lenders extending amortizations to 30 years amid high interest rates and persistent inflation.
Choosing mortgage terms
Types of mortgage terms
Short-term mortgage: Short-term mortgages are typically those with a term of less than five years. You can choose between a fixed or variable interest rate and get a lower interest rate at the time of signing up. The shorter the term of the mortgage, the sooner you have to renew it.
Long-term mortgage: Long-term mortgages are typically those with a term of more than 5 years. Long term mortgages usually have a fixed interest rate and you may have to pay a prepayment penalty if you sell your house within the first five years. The longer the term of the mortgage, the more likely you will get a lock-in interest rate over a long period of time.
Convertible term mortgage: A convertible mortgage term starts off as a short term contract and gets extended into a long term contract. With the extension comes the change in interest rate (usually the same rate applied to a long term mortgage).
Payment timeline and frequency
Getting the optimum repayment timeline and frequency of payments implies a careful understanding of the dynamics between the interest rate and the amortization period. Lending institutions opt for higher interest rates if the loan term is longer as they usually consider the inflation and the depleting purchasing power of money over time.
How mortgage terms affect you
The interest rate on your mortgage is the primary deciding factor of how much payment you will have to shell out every month. The longer the amortization, the higher your interest, and the heftier your instalment payments.
Lending institutions project their future cash flows depending on the payments to be received over a period. The longer the repayment period, the more these lending institutions earn as interest. Any disruption in this estimated flow, such as renegotiating your contract or paying off your entire mortgage before the end of the term, may result in penalties.
Having said that, a lender cannot stop a consumer from wanting to get rid of the debt quicker than the pre-agreed term.
A prepayment penalty is levied if you repay your mortgage in full before the tenure ends. The penalty amount depends on the mortgage amount and the period over which you were to pay it back. Since this amount can go into thousands of dollars, it is always advisable to look at your life situation and future plans. Then decide on an optimal term and stick to it.
Mortgage term and amortization are two things that often get confused. While your mortgage term is the length of time your contract is in effect for, your amortization period is the length of time it will take you to pay back the mortgage in full. The longer the amortization period, the lower the monthly installment payments. On the other hand, the longer it takes to pay off the mortgage, the more interest you will pay over the years.
Mortgage comparison websites
Homewise is one of the most well-known mortgage locators in Canada. Its comparison engine runs through a vast network of more than 30 banks and lenders. Data published on their official website suggests that borrower benefits can be US$10,000 on average.
Accessing Homewise is easy. The user answers some simple questions before a consumer profile is built. Next, the website goes through its network of lenders to find the best available mortgage, befitting the unique customer profile.
The platform deploys a mix of AI-based and human-powered services. The AI engine helps locate the best deals, while a personal advisor guides the consumer through each step, starting from approval to close. Homewise has helped Canadians access mortgage financing worth more than $2.5 billion, according to the latest available numbers.
On this website, you take a short quiz and based on your answers to locate the best mortgage, suitable to the users’ needs. It also helps compare home insurance schemes, a crucial aspect of ensuring the utility of the customer’s investment. In a few clicks, you get to know your ideal mortgage payment amounts, whether you qualify for the mortgage, and whether a fixed or variable mortgage model would suit your needs.
LowestRates.ca requires you to answer a few qualifying questions, like whether you’re looking for a mortgage for a new home, or refinancing or renewing an existing mortgage.
It takes a little more than a couple of minutes to run through its network of more than 50 Canadian banks and brokers to see the best available quotes. The process is free and requires no prior commitments. When a consumer accepts the best quote available, the platform connects them with a licensed broker or agent.
Nesto is an online brokerage that provides commission-free mortgage rates from 10+ lenders with the convenience of applying through the website itself. Nesto also has advisors that guide you through the entire mortgage purchase process.
Qualifying for a mortgage
The credit score of the consumer is an obvious qualifying criterion. One can qualify for a standard mortgage, as a Canadian resident, with a score of 680 or above. Qualifying for a mortgage with a score of less than 680 requires one to go through the Newcomer to Canada route. However, the down payment requirement stays the same.
The minimum down payment in Canada is 5%. Anyone paying less than 20% f the purchase price will also have to take out a mortgage insurance such as CHMC. This insurance protects the lender in case you are unable to pay your instalments.
Your source of income is a major deciding factor when it comes to qualifying for a mortgage. Both part-time and full-time employees need a letter from the employer confirming their income. If your income is from self-employment, rents, properties, support or alimony payments, or pensions, you will have to submit copies of your last two year’s tax returns and settle any outstanding taxes before applying.
A mortgage pre-approval can give you a guaranteed mortgage rate while you are still deciding on a home. Typically, a pre-approval is good for anywhere from three to four months.
When you get a mortgage pre-approval, you’ll also find out how much mortgage you can afford. Securing a pre-approval signals your seriousness as a buyer to both realtors and sellers. It also offers a safeguard in a highly competitive and fast-fluctuating market.
Choosing mortgage terms that are right for you depends on a variety of factors. Evaluate your budget, project your future cash flows and opt for a pre-approval so that you get a clear idea of your mortgage amount, term, and amortization period.
Gaurav Roy is a freelance writer who began his cryptocurrency journey in 2017 as a novice crypto trader. Within no time, he started reading about various cryptocurrency projects and soon found himself writing content for crypto companies and crypto media outlets, including Securities.io, Shield Finance, CryptoVantage, Greeneum Network, Coin Tribune, and more.
Frequently asked questions
The maximum you can stretch your mortgage term in Canada is 25 years, though there are some exceptions. Earlier the maximum period was 40 years. However, since 2008 mortgage regulations in Canada have become much stricter and the government has eliminated the 40-year plan. A longer mortgage term means higher interest. Moreover, “A” lenders like banks and credit unions are not keen to offer 35+ year mortgages.
According to the latest available data, the average new mortgage in Canada comes with a 25 year amortization period. The longer the amortization period, the higher interest one has to bear as part of their repayments. Home buyers try to strike a balance between the time and instalment amount, which is why most people settle for a tenure of 25 years.
A mortgage term denotes the time a mortgage contract is in effect, implying you are locked into all the conditions stated in your mortgage contract. Upon completing the term, you can choose to renew it with your existing lender or find a new lender and a new term contract based on new interest rates. On the other hand, an amortization period is the number of years take a mortgage consumer to pay off the mortgage in full, staying compliant with the agreed interest rate and payment schedule.