Home Mortgage Terms

Mortgage Terms

After some browsing on the market you will likely find some homes of interest to you and you will need to know what is within your financial comfort level. I recommend speaking to a mortgage professional to help you examine your choices. There are mortgage calculators on the internet, and PCS can help, though there is a lot more to a mortgage than just the rate.

Here is an information sheet that looks at the basic qualifying information.

As well as examining how much debt you want to take on, getting pre-approved before actively looking is always a good idea. You don't have to use the full amount the bank is willing to lend you, consider your other financial needs and leave some room for the unexpected.

Here are some of the more common mortgage terms and considerations:

Sunsets over winter forest with Coastal Mountain Range and Georgia Strait in the background.

Sunset settles over the forest with the BC Coast Range and Georgia Strait in the background.

Principle is the amount borrowed for the mortgage and interest is the interest charged on the principle.

Amortization period, which can be up to 25 years, is the length of time it will take to pay the mortgage off. This time period, along with the interest rate, is used to calculate the monthly payments. The shorter the amortization period, the faster the mortgage is paid off, and the less interest will be paid, but the payments will be larger.

Term is the length of time for the current mortgage, most often 5 years, at which time you will need to renew the mortgage. Periods of one to five years, and sometimes longer, are possible.

Fixed rates set the interest rate so they won't change for the term of the mortgage. This allows certainty for what your payments will be and help with budgeting and peace of mind.

Variable rates vary according to the interest rates and can increase or decrease and tend to be lower than fixed rates. Mortgage rates have been moving up a little over the last year, though are still low. See Market Update for the latest forecast.

Payments are usually a blend of interest and payment on the principle (mortgage amount).
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With a fixed rate, even though the payment amount stays the same, the amount of the payment that goes to interest decreases, and the amount that goes to principle increases over time. (This is because as a portion of the principle gets paid off each month, there is then less principle to pay interest on, which decreases the amount of interest, leaving a larger amount of the payment to be applied to principle).

Payment schedules are generally monthly or bi-weekly, and sometimes weekly.
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The more frequently you make payments, the less the amount of interest charged as it is a shorter period that interest is being applied. In addition, bi-weekly and weekly payments can be set up to result in an extra payment being made each year. For example, a $1,000 monthly payment = $12,000/year, but a $500 bi-weekly payment ($500 x 26) = $13,000/year or a $250 weekly payment ($250 x 52) = $13,000/year. This is often referred to as accelerated bi-weekly or accelerated weekly schedule. In the example here, a non-accelerated bi-weekly payment would be around $461. That extra $40 every two weeks can have a dramatic affect on how quickly you build equity in you home.

Payment flexibility is important. Mortgages often allow extra payments, or up to a certain amount that can be made on an annual basis. These payments go directly to the principle, thereby speeding up how fast the mortgage is paid off, and decreasing the amount of interest paid.

Prepayment penalties can apply if you pay your mortgage out early, usually because of selling your home. Often it is equivalent to three months interest, but other factors can apply. It is important to identify what this penalty is for the mortgage you are looking at.

Rate is the interest rate the mortgage charges, and it varies by the type of mortgage and the lender. While this is a critical factor, other factors, such as flexibility and penalties, also need to be considered when choosing a mortgage. It pays to shop around.

Mortgage insurance provides the lender with insurance in the case the mortgage is not repaid, and this helps buyers secure a mortgage with less than a 20% down payment.
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The insurance rate (a percentage of the mortgage) usually various with the amount of the down payment, the larger the down payment, the lower the rate. For example, 10% down payment will have a lower rate than a 5% (the minimum) down payment. The premium is usually added to the mortgage amount and covered with the mortgage payments.

Title insurance is insurance to ensure that the buyer obtains lawful title to the property purchased, and is obtained through a lawyer or notary. Usually it is the bank that requires it. With the Torrens land registration system and the indefeasibly principle it is very unlikely that an issue will arise (see Title on the Home Ownership page).

The mortgage contract is a legal document that has a number of terms, such as requiring you to pay property taxes, insure and maintain your home, and it gives the bank the right to foreclose, to name a few. Rates, policies and practices of lenders can be different and can change over time. It is important to have a qualified mortgage profession help you through this step.

Mortgage Terms

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