5 mortgage terms you need to know
Are you confused by all the mortgage terms out there? You’re not alone. Amortization, term, fixed, variable… where does it end? Luckily, you’ve come across the right article. Here is a breakdown of five terms you need to know about a mortgage, so you’ll be confident when dealing with your lender, and another step closer to owning your own home.
Amortization
Your mortgage amortization is the period of time it will take you to pay back your mortgage in full. In Canada, the most common amortization period is 25 years, although the maximum you can get is 30 years (the maximum went as high as 40 years several years ago, but was reduced after the financial crisis). Although the maximum is 25 or 30 years, there’s nothing stopping you from taking a shorter amortization. For example, you could amortize your mortgage over 15 or 20 years instead. By doing this your mortgage payments would be higher, but you’ll be less interest over the life of your mortgage. If your goal is to be mortgage-free sooner and you’re financially disciplined, you might choose a mortgage with a longer amortization period and maximize your prepayments. That way you can still save on interest and won’t be tied to higher mortgage payments in case you lose your job.
Term
Your mortgage term is the period of time in which you agree to pay back your mortgage to your lender. Although your mortgage term and amortization period can be the same, they’re often different. For example, you may have a 5-year fixed rate mortgage (your term) amortized over 25 years (your amortization period). At the end of your mortgage term, you can repay your mortgage in full, but most choose to renew their mortgage for another term. The most popular mortgage term in Canada is the 5-year fixed rate. This offers homebuyers financial stability since your mortgage rate and payment will stay the same over those 5 years.
Mortgage default insurance
Mortgage default insurance, commonly known as CMHC fees, is what you’re required to pay your lender when your mortgage is high-ratio. What’s a high-ratio mortgage? It’s when you make an initial down payment that is less than 20%. Mortgage default insurance is most commonly added on top of your total mortgage balance and paid along with your regular mortgage payments. Unlike other forms of insurance that protect you, mortgage default insurance protects your lenders, in case you default (fail to repay) your mortgage in full. You can avoid mortgage default insurance by putting down more than 20% on a property.
Fixed rate
A fixed rate mortgage is a mortgage where your rate remains the same for the duration of your term. For example, if you signed up for a 5 year fixed rate mortgage at 2.99%, your mortgage rate would remain 2.99% over those next 5 years.
Variable rate
A variable rate mortgage is a mortgage where your rate and payment amount can change throughout your term. The rate may change depending on if your lender increases or decreases its prime rate (the rate it offers to its most creditworthy customers). The initial mortgage rates on variable rate mortgages are usually lower than the fixed rate. For that reason, if you think mortgage rates are going to fall or stay the same over the next five years, you might choose a variable rate mortgage.