Mortgage Term: The period of time that you are negotiating your rate, and mortgage contract for.
For example, a 5 year fixed term will hold your rate for 5 years. The provisions of the mortgage contract will also apply for 5 years. Then when the 5 year term is over, the mortgage renews and a new term is negotiated. The new term can be with the same lender, or lenders can be switched if there is a better offering with a different lender.
The term can be between 1-10 years, and be fixed or variable.
Amortization: The longer period of time that your payment is based on.
For example, it is common for a mortgage to start with a 25 year amortization. Even though your rate may be based on a 5 year term, the payment is calculated over 25 years in this case. This longer payoff period helps to keep payments more manageable. If a mortgage starts with a 25 year amortization, then after 5 years of mortgage term, the remaining amortization will be 20 years. Therefore, several terms are usually negotiated before the mortgage is paid off.
The fixed Vs variable rate question is one of the biggest in the world of mortgages. What does this mean?
Fixed rate mortgages have a fixed payment and a fixed rate for the term. When the Central Bank of Canada moves rates up and down over the years, these changes do not affect the fixed rate term. You are guaranteed the rate will not change throughout the term.
The fixed rate is popular because it provides stability and consistency in payments. This can help for budgeting purposes and provides peace of mind for many borrowers. The standard fixed rate is 5 years however shorter terms can be strategically selected for renewing sooner at potentially lower rates.
Variable rate mortgages will change or ‘float’ with changes made by the Central Bank of Canada. After the mortgage closes, your interest costs will move up and down over the term.
The variable rate may appear less desirable, however, over the past 50 years the variable rate has generally shown to cost less than the fixed rate terms. Although savings are not guaranteed and there will be more volatility with the rate over the term, it can lead to interest savings – especially when rates are projected to drop.
The down payment is the portion of the home purchase that isn’t mortgaged. It’s your ‘skin in the game’.
In Canada, the minimum down payment is 5% – however, this can be gifted by immediate family or potentially loaned if needed.
Any down payment of less than 20% must be ‘insured’ by the Canadian Mortgage and Housing Corporation (CMHC), or another mortgage insurer. The CMHC insures the lender incase payments have stopped and the lender is in a situation of losses, especially if home values have dropped as well. In this case the CMHC would take over the mortgage from the lender. There is a one time CMHC or ‘premium’ that is added to the mortgage. The CMHC fee is not a monthly fee and does not repeat on each term.
At 20% down payment there is no CMHC fee because this is deemed to be a lower risk for the lenders and the financial system as a whole.
The purpose of the credit score is to provide a profile of past behaviour with credit management and making payments.
The rationale is that past behaviour is a good indication of future behaviour. So if there is a good history of making loan and credit card payments on time, then lenders can be comfortable that this pattern will continue.
This is not to say that credit behaviour can’t change, and there are many instances where a specific period in life prevented on time payments. However for an extended period after this period, on-time payments have been consistently demonstrated.
The credit score itself ranges from 450 – 900 and typically lenders will need to see a score in the 670 -700 range or higher for the lowest rates.
Find out more about credit scores in our pre approval guide.