One of the most common sources of confusion for prospective home owners is the difference between a mortgage term and amortization period. A typical mortgage in Canada has a 5-year term with a 25-year amortization period.
Amortization is the process of paying off the principal balance owed on the mortgage through scheduled, systematic repayments of principal and extra payments of principal at irregular intervals. Usually associated with a target period (the standard being 25 years) over which the initial blended payment is calculated. The maximum amortization period available in Canada is 35 years. In Canada the lender will agree to loan money to the consumer only for a portion of the amortization period called the ‘term’.
The mortgage term is the length of time you commit to the mortgage rate, lender and associated mortgage terms and conditions. The term you choose will have a direct effect on your mortgage rate, with short terms historically proven to be lower than long-term mortgage rates.
Generally you will enter into a 5 year contracted term with a lender. On occasion, 4 year, 3 year and even 2 year terms can offer lower interest rates. In order to qualify for the lower interest rates with lesser years, you have to be able to debt service at the Bank of Canada benchmark rate (4.64%), which means the lender will look at all your numbers and see if you can afford this same mortgage if the rate was 4.64%.
Every individual has needs that are unique to their situation, so let us help you find your best term and amortization period for your mortgage.
Keywords: amortization / mortgage rate/ lender / interest rates
