When it comes to applying for a mortgage, understanding the terms and conditions is essential. With so many different mortgage options in Canada, it can be difficult to make sense of all the different terminology used throughout the process. To make it easier, we’ve put together a guide to understanding the different mortgage terms in Canada.
Mortgage Term
The mortgage term is the length of time that you agree to a mortgage contract. Typically, mortgage terms in Canada range from 6 months to 10 years. The shorter the term, the higher the monthly payments, but you’ll pay off the mortgage more quickly. A longer term will lower your monthly payments, but you’ll pay more interest over the life of the loan.
Amortization
Amortization is the amount of time it will take to pay off your mortgage, including interest. This typically ranges from 20 to 25 years. The longer the amortization period, the lower the monthly payments, but you’ll pay more interest over the life of the loan.
Interest Rate
The interest rate is the percentage of the loan amount that you pay in interest each year. Interest rates in Canada range from 1.99% to 5% and can be either fixed or variable. A fixed rate means that the interest rate will remain the same throughout the entire term of the loan, while a variable rate means that it can change.
Closed vs. Open Mortgages
A closed mortgage is a loan where you are not allowed to make any additional payments towards the principal without incurring a penalty. An open mortgage, on the other hand, allows you to make lump sum payments, or even pay off the entire loan at any time without penalty.
Prepayment Privileges
Prepayment privileges allow you to pay off the loan before the end of the term. This can help you save money on interest payments, although it may come with some restrictions. For example, some lenders may limit the amount you can prepay each year.
Mortgage Insurance
Mortgage insurance is an additional cost that is required if you put down less than 20% of the purchase price of the home. It is designed to protect the lender if you default on your loan payments.
These are just a few of the terms you’ll need to understand when applying for a mortgage in Canada. While the process can be daunting, understanding the different mortgage terms can help make the process smoother.