Mortgage – is a loan that is secured by real estate. For a bank to lend money to the owner/purchase of real estate, it will register a charge on the title of the property to indicate that they have an interest in that property up to the value registered.
Amortization – refers to the length of time it would take to pay off a mortgage if the interest rate remained constant throughout the loan term. It is used to determine the appropriate monthly payments. The higher the amortization period, the longer it will take to pay off the mortgage, but the lower the monthly payments. Typically, amortization periods are 25 or 30 years. Some more expensive lenders can accommodate amortization periods of up to 40 years or more.
In Canada, mortgages are renegotiated periodically, and new rates and payments are set at that time. In contrast, in the United States, mortgages are not renegotiated periodically. It is common to have a 30-year mortgage with a fixed interest rate for the entire term. Imagine securing one of those 30-year mortgages when interest rates were exceptionally low!
Term – refers to the length of the agreement for the mortgage. In Canada, it is typically between 1 and 5 years before the mortgage rate is renegotiated.
Maturity date – refers to the date the mortgage term ends. At this time, you can either pay the mortgage balance in full without penalty, renew or refinance the mortgage.
Open term – refers to a type of mortgage where you can pay it off in full at any time without any penalties. These usually carry much higher rates than closed term mortgages.
Closed term – refers to a type of mortgage where paying in full or payment exceeding the allowed prepayment will incur penalties.
Fixed rate – refers to a mortgage option where the interest rate remains constant throughout the term of the mortgage. This has the benefit of predictable and identical monthly payments but the disadvantage of higher penalty for early repayment, especially if the fixed rate mortgage is issued by a major bank.
Variable rate – refers to a mortgage option where the interest rate changes based on the lender’s prime rate, which typically follows the Bank of Canada’s policy interest rate (also known as the overnight rate). For example, if the Bank of Canada lowers its rate by 0.25%, the lender’s prime rate usually decreases by the same amount. This means the interest rate on the mortgage will also drop by 0.25% until the next adjustment.
When the interest rate decreases, the amount of interest charged on the mortgage is reduced. To keep monthly payments the same, the lender may apply the savings directly to the mortgage principal, helping to pay it off faster. If the interest rate increases, the reverse happens—more of the payment goes toward interest, and less toward the principal. Some lenders, however, adjust the monthly payment instead of the principal to maintain the original amortization schedule. In this case, if rates rise, monthly payments increase. This type of mortgage is technically called an adjustable-rate mortgage (ARM), though the terms “variable rate” and “adjustable rate” are often used interchangeably.
One advantage of a variable or adjustable-rate mortgage is that the penalty for paying it out early is usually capped at three months’ interest. However, keep in mind that some lenders may calculate this penalty using a rate other than the mortgage’s contract rate.
