What Are Common Mortgage Terms & Amortization?

When looking for a mortgage, you have many decisions, including choosing the mortgage terms and amortization. These are two big decisions when choosing your mortgage. Here’s what you should consider when deciding.
What are Mortgage Terms?

Your mortgage terms refer to how long you have to repay your mortgage and the interest rate you’ll pay. You must renew your mortgage or repay the full balance when your term ends.

The Available Mortgage Terms

There are three common mortgage terms most borrowers can choose.

⮕ Short-Term Mortgages

Short-term mortgages have terms of five years or less. A shorter term usually offers a lower interest rate, but you must renew your mortgage (or pay it off) earlier. Most short-term loans are available at both fixed and variable interest rates.

⮕ Long-Term Mortgages

Any mortgage with a term of five years or longer is a long-term mortgage. Most long-term mortgages are for a fixed rate only, and the rates are higher because they are locked in for a longer period, such as 7 or 10 years.

It’s important to know that terms of five years or longer usually have a prepayment penalty if you pay the loan in full within five years.

⮕ Convertible Term Mortgages

A convertible-term mortgage is a short-term mortgage that you can convert to a long-term mortgage. However, when you extend the loan, the interest rate typically increases to the term the lender offered for long-term mortgages when you borrowed your mortgage.
What is Amortization?

Amortization refers to the time it takes to pay your loan in full. Your term refers to how long you have the current lender with your contract rate & terms, before renewing your mortgage. Amortization, usually 30 years or less, refers to how long it will take you to pay the loan, given the current terms with your lender. 

A typical example of this would be a 5-year fixed-rate mortgage (your term) with a 25-year amortization.

What to Consider with Mortgage Terms and Amortization

When considering your mortgage term and amortization, think long-term.

The mortgage term refers to how long you have a specific interest rate before you must renew. Are you comfortable with a shorter term and the requirement to renew your mortgage and/or pay it in full?

If not, a longer term may be a better option for you. However, the longer the amortization or how long it takes you to pay the loan in full, the more interest costs you’ll pay over time.

The less time you have the lender’s money outstanding, the less interest you pay, and vice versa.

When choosing the right terms and amortization, think about what you can afford now and in the long term as you work to pay your home off in full.

However, if you think that your life plans may change before your term is up, consider a shorter term. Longer fixed terms tend to have higher penalties if you break them, which is common if you decide to sell or refinance your home within that 5 years.

Final Thoughts

Your mortgage term and amortization are important factors when applying for a mortgage. Unfortunately, many borrowers focus on the interest rate and don’t think about the long-term effects of the mortgage.

Instead, look at the big picture. What will the loan cost in the long run, and how many unknowns are there? For example, if you take a short-term, how often must you renew the loan and at what cost? Will you likely incur a penalty in the future for breaking your term? A large penalty can certainly outweigh the importance of getting the lowest interest rate.

Looking at the big picture and the loan’s total costs will help make home ownership as affordable as possible, now and in the future.

Very rarely do people have the cash to buy a house in full. Most borrowers must put money down on a home to purchase it, known as a down payment. Lenders make up the difference with a mortgage loan, using your new home as security until your mortgage is paid off. Many borrowers qualify to put down less than 20% on a home but must pay mortgage insurance.

When you put more than 20% down, this insurance is not mandatory. Understanding how mortgage insurance works and whether you should make a 20% down payment is very important when buying a home.

How Much Must you Put Down?

All borrowers have a minimum amount they must put down on a home. You are always free to make a larger down payment but must meet the minimum to qualify. The minimums are as follows:

· Sales price $500,000 or less = 5% down payment
· Sales price $500,000 – $999,999 = 5% down on the first $500,000
and then 10% on any amount over $500,000
· Sales price of $1 million or more – 20% down payment

Keep in mind that just because you have the minimum down payment, doesn’t always mean you qualify. There are many other factors that lenders consider, such as your income, employment history, savings, debts, credit score & history, and much more.

Paying Mortgage Insurance

You’ll pay mortgage insurance if you don’t put down at least 20% on a home. This insurance protects the lender should you stop making your payments. However, you are responsible for the premiums, and lenders can require mortgage insurance even with a 20% down payment if you have bad credit or are self-employed because you are still a high risk of default. This insurance gets added to your mortgage and isn’t required to pay out of pocket. Here is a great calculator by CMHC to determine your potential premiums and mortgage payment: CLICK HERE

There are three companies that provide this insurance to Canadians, CMHC, Canada Guaranty and Sagen. They all offer the same premiums but some have different programs & policies.

How a Down Payment Affects your Mortgage Payment

The more money you put down on a home, the lower your mortgage payment will be because you borrow less to buy the house.

In addition, the more money you put down, the less you’ll pay in mortgage insurance because you have more invested in the home. So if you can meet the 20% down payment requirement, you’ll have the lowest mortgage payment because you won’t pay mortgage insurance (in most cases).

Homebuyer Assistance Programs

If you don’t have 20% to put down, or enough to qualify for a mortgage, there are a couple of plans that may help.

Homebuyer’s Plan (HBP)

The Homebuyer’s Plan allows up to a $35,000 withdrawal from your Registered Retirement Savings Plan. In addition, you won’t pay taxes on the amount you withdraw as long as you repay the amount within 15 years.

Before withdrawing from your RRSP, make sure it won’t affect your long-term retirement plans, especially if you’re nearing retirement.

First-Time Homebuyer Incentive

If you’re a first-time homebuyer, you may be eligible for a shared equity mortgage with the Canada Government.

This financing is interest-free and has a 25-year repayment period. However, you can prepay it at any time and must repay if you sell the house before paying the loan in full.