Understanding Mortgage Terminology

When Bank of Canada Governor Tiff Macklem reassured Canadians that interest rates will remain low for at least the next two years, it renewed hope among would-be home buyers that home ownership might be within reach. The June and July TRREB sale statistics support that demand is strong at the moment. Before you start looking at homes for sale and considering mortgage options, here is a primer on mortgage terminology.

 

 

 

 

 

 

Principal vs. Interest.  The principal is the amount of money you are borrowing to buy the property. The interest is what the lender is being paid to lend you the money.

Fixed vs. Variable Rate.  A variable rate mortgage has an interest rate that fluctuates with any changes in overall interest rates. If interest rates go down, more of your payment goes towards the principal. If they go up, less of your payment goes toward the principal and more toward the interest portion. If interest rates are expected to go down, a variable rate might be best.

A fixed rate means that the interest rate will remain the same for the term of the mortgage. If interest rates are expected to rise, a fixed rate might be best.

Open vs. Closed Mortgage.  An open mortgage means that it can be partially or fully repaid at any time without penalty saving the home buyer a lot of money in interest.

A closed mortgage means the opposite – that there would be a penalty if you chose to prepay, renegotiate or move the mortgage before the end of the term.

Amortization vs. Term.  Amortization is the total length of time it will take to repay the mortgage, generally 15 or 25 years.  The term is the length of the contract you undertake with the lender usually 2, 3 or 5 years after which time you will need to renegotiate a further term.

The thing to keep in mind when considering a mortgage is that rate is not everything. Look for payment alternatives such as bi-monthly or every two weeks payments that will greatly reduce amortization time. Also look for annual pre-payment or skip-a-payment options that many lenders offer even on their closed mortgages.

If in doubt your REALTOR® can introduce you to a mortgage specialist who will take you through your various options.