Mortgage Terms Explained
A mortgage term is defined as the length of time you’re committed to a specified mortgage rate, lender and parameters defined by that lender. At the end of a mortgage term, the borrower can pay off the remaining balance, renew the mortgage term, refinance the mortgage, or change lenders. Canadian homeowners often renew their mortgage multiple times throughout their entire amortization period.
The length of a mortgage term can vary drastically, they can be anywhere from 6 months to 10 years in length. In Canada, the most common length of a mortgage term is 5 years.
Difference Between Mortgage Term and Amortization Period
As described above, a mortgage term is the length of time you are committed to a particular interest rate, lender and conditions of a mortgage with that lender. On the other hand, an amortization period is the length of time it takes to pay off your entire mortgage. Of course, the amortization period is longer than the mortgage term. These two terms are often confused with one another, so it is important to understand the difference.
Choosing a Mortgage Term
Throughout a mortgage term, you will be dedicated to a certain interest rate, lender, and mortgage agreement parameters. For this reason, a mortgage term should be selected carefully as you’ll likely be locked in for approximately 5 years. At the end of those 5 years, you can reflect on your previous financial decision and make a better decision for your next mortgage term.
A short mortgage term is considered to be a term of 3 years or less. Short term mortgages often have better interest rates, but the borrower is exposed to more interest rate risk because more frequent renewals are required. That being said, short mortgage terms have their advantages especially if you’re going to sell your property soon, you’re expecting your financial position to change, or you'll need access to the equity in your house soon.
A long mortgage term is considered to be anything greater than 3 years. Long term mortgages often have higher interest rates but they also provide more stability. It’s ideal if the mortgagee is comfortable with being unable to sell their home or refinance their mortgage until the maturity of their mortgage term. There are often penalties to break a mortgage term early which is why this is important. Long mortgage terms are ideal if interest rates are on the rise, and if your property produces income and you need to be able to easily forecast cash flow.
When you’re choosing a mortgage term make sure that you consider your personal finances, goals and current position. A mortgage is a large financial decision, so the term that you choose should compliment your finances. There are penalties and additional costs to breaking a mortgage term early, by choosing an ideal mortgage term you can avoid these repercussions.