Mortgage terms you must know

July 26, 2021

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There are many options when it comes to choosing a mortgage.  Your lender or mortgage broker can help you find the right mortgage for your needs.  Your discussions will involve many terms that may not be familiar to you.   Increase your comfort and understanding by getting to know these common mortgage terms.

As always, feel free to contact me with your questions or to help you find a mortgage broker/lender to suit your specific needs.

Amortization period:  The length of time you agree to take to pay off your mortgage (usually 25 years).

Mortgage term:  The length of time that the mortgage options and interest rate you choose are in effect.  It can be anywhere from 6 months to 10 years.  When the term is up, you can renegotiate your mortgage and choose the same or different options.

Payment schedule:  How often you make your mortgage payments.  It can be weekly, every two weeks (biweekly), twice a month, once a month, or accelerated weekly or biweekly.

Types of interest rates:

Fixed rate:  The rate doesn’t change for the term of the mortgage.

Variable rate:  The interest rate fluctuates with market rates.

Protected (or capped) variable rate:  The rate fluctuates but will not rise over a preset maximum rate.

Open and closed mortgages:

Open mortgage:  Lets you pay off your mortgage in full or in part at any time without any penalties.  If you have an open mortgage, you can make a prepayment or lump-sum payment without paying a penalty.

Closed mortgage:  Offers limited (or no) options to pay off your mortgage early in full or in part, but it usually has a lower interest rate.

Conventional and high-ratio mortgages:

Conventional mortgage:  A loan that is equal to or less than 80% of the lending value of a home. This requires a down payment of at least 20%.  In Ontario, if the home you are buying is more expensive than 1,000,000, you will have to have a conventional mortgage.

High-ratio mortgage:  A loan that is over 80% of the lending value of a home.  This means the down payment is less than 20% and will likely require mortgage loan insurance.

Down payment: The amount of money that you put toward the purchase of your future home.  In general, to purchase a property, the minimum down payment is 5% for a property value of $500,000 or less, and 10% for any amount above $500,000, and 20% for amounts over $1,000,000.   You will also need to prove the amount and sources of your down payment.  Some common sources include personal savings, an RRSP withdrawal, a non-repayable gift from an immediate family member, proceeds from the sale of other property, and funds borrowed against proven assets.

Prepayment options: The ability to make extra payments, increase your payments or pay off your mortgage early without incurring a penalty.

Portability: An option that lets you transfer or switch your mortgage to another home with little or no penalty when you sell your existing home.  Mortgage loan insurance can also be transferred to the new home.

Mortgage stress test: You will need to pass a “stress test” in order to qualify for a mortgage loan with federally regulated lenders and credit unions. The stress test exercise ensures that you can afford payments at a qualifying interest rate that is typically higher than the actual rate in your mortgage contract.  This helps ensure that homebuyers won’t take on too much debt and will have the means to make their mortgage payments if interest rates rise or their income decreases.

Prepayment penalty:  A prepayment penalty (also called prepayment charge or breakage cost) is a fee that your mortgage lender may charge if you:

  • pay back your entire mortgage before the end of your term, including when you sell your home
  • transfer your mortgage to another lender before the end of your term
  • pay more than the allowed prepayment or lumpsum amount toward your mortgage
  • break your mortgage contract

Prepayment penalties can cost thousands of dollars.  It’s important to know when they apply and how your lender calculates them.  If you have an open mortgage, you can make a prepayment or lump-sum payment without paying a penalty.   Click here for my blog post dedicated to payment penalties and how to avoid them.