29 Sep Choosing Your Mortgage Term & Amortization Period
Buying a home is exciting. House-hunting, comparing condos to townhomes, looking at number of bedrooms and outdoor space… there’s a lot to consider.
Apart from the fun stuff, there are also many financial details to take care of. First you’ll need to qualify for a mortgage. Then you’ll have to learn about your options, and decide which are best for you. All of this information can feel a little overwhelming when just starting out.
If you’re looking to buy your first home, it’s important to first understand all of the mortgage lingo. Today, let’s explore how to choose your mortgage term and your amortization period.
One important fact to keep in mind when googling information online is that mortgages work differently in Canada than in the United States. Always make sure the information you find is meant for Canadians.
In Canada, a mortgage term is defined as the “length of time that the mortgage contract conditions, including interest rate, is fixed.” (CMHC) 5 year terms are most popular, but terms can range anywhere from 6 months to 10 years.
Which term period is best? Well, it depends on a few factors. First, what are current interest rates like? Each term length will have a different interest rate, and lenders often have specials. For example, at the time of writing this article, the Bank of Montreal has the best big bank 5 year rate at 2.59%, but TD is offering a special rate of 2.09% for 2 year terms. It pays to shop around.
Another factor is how long you plan to stay in your home. If there’s a chance you’ll need to sell and rent instead, you’ll need to break your mortgage if your term isn’t up. Breaking a mortgage comes with steep penalties, often into the thousands of dollars. A shorter term can minimize the risks and costs. But you’ll be happy to learn that it’s usually possible to transfer your mortgage without penalty if you decide to buy another home.
Since every situation is different and specials change often, a mortgage broker can explain which mortgage term makes sense for you.
The amortization period is different from the mortgage term. It is the “length of time over which the debt will be repaid.” (CMHC) Over the years, you will likely have many mortgage terms, but only one amortization period.
In Canada, the Canadian government has strict rules in regards to amortizations. Currently, the maximum length is set at 25 years, which is also the most popular option. For homeowners with a down payment of at least 20%, amortizations of 30 years or more are possible at the lender’s discretion.
The longer the amortization, the smaller your monthly payment will be. However, you will need to continue those payments for much longer, which means it will end up costing you much more in interest.
Regardless of the term and amortization period you choose, take the time to get a second opinion on your numbers. A licensed mortgage broker, for example, can show you your options and provide you with a breakdown of your payments and fees. For free advice, call me today at 416-639-0786 or see my homepage for more information.