Understanding Canadian Mortgage Terms

A mortgage term can be defined as the amount of time you are committed to various aspects of your mortgage loan. This includes things like your lender, your mortgage interest rate and also the conditions set by your lender. Mortgage terms vary in Canada, but most Canadians choose a 5-year mortgage term.

Once your mortgage term is up, it will be time for a mortgage renewal. For your renewal, you would then renew based on the principal amount remaining on your mortgage, for whatever term you prefer. For instance, you can renew your mortgage every 5 years if you prefer until the principal amount is paid in full.

Choosing Your Mortgage Term

Your financial situation and your goals both play a tremendous role in the decision you will make when choosing the right mortgage term for you. You have a few options:

Choose a longer mortgage term to get a better interest rate
Choose a shorter term that offers more flexibility, but doesn’t protect you from increasing interest rates down the road

Although these are not the only term options that are available to your, it’s crucial that you choose a mortgage product with the right term that can work best for you. For instance, it’s not uncommon for homeowners to sell their homes within only a few years. In this case a shorter term is always better, since it would help to avoid prepayment penalties. Either way life can be unpredictable, so better safe than sorry.

How Your Term Affects The Amount You Can Borrow?

Many borrowers don’t understand the relationship between qualifying for a mortgage, their loan term and their rates. We don’t want you to be one of those many borrowers. Once you know that you qualify for a mortgage with a particular lender, your mortgage professional will negotiate your term and rates. These two things will affect how much you can actually borrow.

Let’s say your lender got you a 3-year, fixed term mortgage at 3.09 percent, but the 5-year, fixed term mortgage rate was 5.34%. First you’d have to prove to the lender that you can afford the mortgage payments at the higher 5-year rate, so that they’d approve your for the 3-year term.

In the end a lender will ultimately determine how much you can afford to borrow.

Your Mortgage Term & Breaking It Early

Life happens. Personal circumstance and life events are sometimes out of your control. When your situation changes you may have to consider breaking your mortgage term earlier than you planned to. This could happen for a number of reasons, including refinancing. However, be advised that by breaking your mortgage term early, can also come a prepayment penalty.