Mortgage terms you should know

Amortization period: The length of time it takes to pay off a mortgage in full. The longer the amortization period, the lower your payments will be. If your down payment is less than 20% of the purchase price of your home, the longest amortization you're allowed is 25 years, otherwise 30 years is permitted.

Mortgage term: The length of time that the options and interest rate you choose are in effect. It can be anywhere from 6 months to 10 years. When the term is up, you can renegotiate your mortgage and choose the same or different options.

Payment frequency: Payment frequency refers to how often you make your mortgage payments. You can also choose an accelerated payment schedule. Accelerated payments allow you to make the equivalent of one extra monthly payment each year. This can save you thousands, or tens of thousands of dollars in interest over the life of your mortgage.

Types of interest rates:

• Fixed rate - The rate doesn't change for the term of the mortgage.
• Variable rate - The interest rate fluctuates with market rates.
• Protected (or capped) variable rate - The rate fluctuates but will not rise over a pre-set maximum rate.

Open and closed mortgages:

• Open mortgage - Lets you pay off your mortgage in full or in part at any time without any penalties.
• Closed mortgage - Offers limited (or no) options to pay off your mortgage early in full or in part, but it usually has a lower interest rate.
• Portable mortgages - If you sell your home to buy another one, a portable mortgage allows you to transfer your existing mortgage. This includes the transfer of your mortgage balance, interest rate and terms and conditions. You may want to consider porting your mortgage if:
• you have favourable terms on your existing mortgage
• you want to avoid prepayment penalties for breaking your mortgage contract early
• Assumable mortgages - Allows you to take over or assume someone else's mortgage and their property. It also allows someone else to take over your mortgage and your property. The terms of the original mortgage must stay the same. You may want to consider an assumable mortgage if:
• you're a buyer and interest rates have gone up since you first got your mortgage
• you're a seller and want to move to a less expensive home but want to avoid prepayment fees because you have several
• years left on your existing term.

Conventional and high-ratio mortgages:

• Conventional mortgage - A loan that is equal to or less than 80% of the lending value of a home. This requires a down payment of at least 20%.
• High-ratio mortgage - A loan that is over 80% of the lending value of a home. This means the down payment is less than 20% and will likely require mortgage loan insurance.

Prepayment options: The ability to make extra payments, increase your payments or pay off your mortgage early without incurring a penalty. The more interest rates rise, the bigger portion of your monthly mortgage payments will go toward the interest versus the principal. Pre-payment privileges can help you pay down your mortgage faster.

Portability: An option that allows you transfer or switch your mortgage to another home with little or no penalty when you sell your existing home. Mortgage loan insurance can also be transferred to the new home.

Mortgage stress test: The stress test exercise ensures that you can afford payments at a qualifying interest rate that is typically higher than the actual rate in your mortgage contract. This helps ensure that homebuyers won't take on too much debt and will have the means to make their mortgage payments if interest rates rise or their income decreases.

TIP:

Consider choosing a broker vs. a bank. A Bank of Canada study found that using a mortgage broker could result in getting a lower mortgage rate than using the big banks. Why? Brokers have access to multiple lenders - therefore having access to even more competitive quotes.