There are a few things to consider when deciding which mortgage is right for you: fixed or variable rate, term length, amortization. But do you know what they mean? And do you know which you should be thinking about?
Below are all the common mortgage terms and conditions you should know so you’re ready when you buy your next home.
This should be the first step before you start searching for a home. A mortgage pre-approval is an agreement from a lender to provide you a certain size of mortgage should you find a suitable property. It’s best to get this done first so you don’t settle on an expensive property and then realize you can only be approved for a smaller mortgage.
Mortgage pre-approvals have rates that are valid for a fixed period of time—typically 90 or 120 days.
Pre-approvals come with a mortgage rate and verify how much you can afford through your income and credit score. That said, they are valid for a fixed period of time—typically 90 or 120 days—and are not final decisions. A lender may not be able to provide you with financing after your offer of purchase has been accepted for a few different reasons including: the appraised value being lower than the purchase price, the property having asbestos or knob and tube wiring, or the home being a heritage home.
Read our page on how to get pre-approved to learn about this process from start to finish.
The alternative to a mortgage pre-approval is a rate hold, which allows you to lock in the best current mortgage rate before getting or renewing your mortgage.
Unlike with a pre-approval, your mortgage application and financial situation have not been assessed by the lender. As a new buyer, your interest rate is guaranteed, but you could be declined for a mortgage based on your financial situation. If you already own and have a 5-year mortgage term with a 120-day rate hold, this means you can lock in that rate within 120 days of the expiration of your term.
The time it takes to pay off your entire mortgage is called your amortization period. A CMHC insured home, meaning a home with less than a 20% down payment, has a maximum amortization period of 25 years. In some cases, a longer amortization of 30–40 years can be selected for a non CMHC-insured home, meaning a home where you’ve put 20% down.
This is the length of time you’ve locked in your rate and terms and conditions. Terms range from six months to 10 years, but the most common in Canada is a 5-year fixed rate.
Check out our page on selecting the right mortgage term to find out more.
Having an assumable mortgage clause can help you if you think there’s a chance you could sell your home before your term is up. It allows you to transfer the remaining mortgage to the new buyer, helping you avoid any penalties or excess fees for breaking your mortgage early. The buyer has to qualify for your mortgage, however, and be approved by your lender before it’s finalized, so it’s not guaranteed to work in every case.
Rather than having the new buyer assume your mortgage when you sell, you can get a portable mortgage so you can transfer your existing mortgage to your new home. You won’t be penalized for breaking your term early, but you will require a property appraisal and credit review when making the new purchase. And if your new home is more expensive than your previous home, you can usually add on to your current mortgage to make up the difference.
These allow you to more aggressively pay down your mortgage. You can increase your monthly payments, which allows you to pay more on your mortgage each month or you can pay as a lump sum, meaning put an additional sum of money toward the mortgage principal.
Example: If your monthly pre-payment option is 15%, you can increase your monthly payment amount by 15% once during your mortgage term. If your lump sum pre-payment option is 20%, you can also make lump sum payments up to a total of 20% of your mortgage each year.
Mortgage pre-payments are important, especially if you buy young, since your income is likely to increase over the course of your career. In 2011, 23% of mortgage holders increased their monthly payments and 19% made lump sum payments.1
Most Canadian lenders offer collateral mortgages, which allow you to borrow money from your home throughout the mortgage term. You don’t have to refinance your mortgage to take advantage of this, and there are no legal fees. You just have to maintain at least 20% equity in your home to borrow up to 80% of its value.
Collateral mortgages can’t be transferred from one lender to the next, even at the end of your term. If you did want to switch lenders, you’d need to hire a real estate lawyer to get out of your contract. Therefore, be sure you ask about collateral mortgages; if you might switch lenders in a few years, this isn’t for you.