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Make your dream home a reality

You finally found your dream home. You explored neighbourhoods, went to open houses, read every housing market article you could find, fell in and out of love with properties – and it was all worth it.

So now you just have figure out what kind of mortgage will make your dream home a reality. You can see that there are a lot of options, but you might not know which is the best option for you. Here’s some helpful information on mortgage terms and options.

What’s the difference between a mortgage term and the amortization period?

Mortgage term

A mortgage term is the length of time you’re committing to your mortgage rate and conditions (fixed or variable, open or closed). When that term is up you have the option to pay off the mortgage or renew it for another term if your lender agrees.

Amortization period

The amortization period is the total length of time it takes to pay off your mortgage, including interest. For new mortgages, the amortization period is usually 25 years.

What’s the difference between a short and long term mortgage?

Short term mortgages

Short term mortgages are 6 months to 3 years. They usually have lower interest rates than long term mortgages.

Perfect for you if:

  • You want the option to renegotiate sooner if interest rates drop.
  • You think you might sell your home or pay off the mortgage early.

Long term mortgages

Long term mortgages are 3 years or more. They usually have higher interest rates than short term mortgages.

Perfect for you if:

  • You want to take advantage of a current low interest rate.
  • You want the stability of knowing what your mortgage will cost you long term.

What’s the difference between a fixed and a variable rate mortgage?

Fixed rate mortgage

With a fixed rate mortgage, your rate is locked in for the duration of your term. This protects you because when interest rates go up or down, you know your rate will stay the same.

Perfect for you if:

  • You want the stability of always knowing what your weekly, bi-weekly, or monthly payments will be.
  • You don’t plan to sell your home before your term is up (sometimes there are penalties for getting out of a fixed rate mortgage).

Variable rate mortgage

With a variable rate mortgage, your rate changes based on the lender’s prime rate. There’s more risk because interest rates might go up, but you also get to take advantage of decreased interest rates.

Perfect for you if:

  • You’re cool with taking a little risk if it means you might save more in the end.
  • You want the opportunity to pay your mortgage down faster.

What’s the difference between an open and closed mortgage?

Open mortgages

You can pay off an open mortgage, either partially or in full, any time during your term without a penalty. They usually have higher interest rates than closed mortgages.

Perfect for you if:

  • You think you might pay off your mortgage in the near future.
  • You want the option to convert to another term later, without a prepayment charge.

Closed mortgages

You can only prepay a limited amount (usually up to 20% of the principal amount) with a closed mortgage. They often have a lower interest rate.

Perfect for you if:

  • You have no plans to pay off or refinance your mortgage before the end of term.
  • You prefer a lower interest rate to extra flexibility.

What’s the difference between a high ratio and a conventional mortgage?

High ratio mortgages

If your down payment is less than 20% of the purchase price it’s considered a high ratio mortgage. These mortgages have to be insured against default, so you’ll pay a bit for insurance, but you can still get a great interest rate.

Perfect for you if:

  • You need to borrow more than 80% of the purchase price of your home.

Conventional mortgages

If your down payment is 20% or more of the property value, it’s considered a conventional mortgage. For homes that cost $1 million or more, 20% is the minimum down payment.

Perfect for you if:

  • You can afford a down payment of at least 20% of your home’s purchase price.

Let’s put it all together

Now that you understand the options you have when putting together a mortgage, let’s look at an example to see what it all means.

Price of your home: $578,000

Down payment: $115,600 (20% of purchase price)

Amortization period: 25 years

Mortgage you’ve chosen: 5-year fixed rate closed mortgage with an interest rate of 3.09%

What does this mean?

  • For the next five years, you would have a monthly mortgage payment of around $2,210 (not including creditor insurance).
  • At the end of five years, you’ll have paid about $132,582 toward the mortgage principal and interest. Your remaining balance will be around $395,915.
  • If you sell your home or refinance before the 5 year term is up you’ll pay a prepayment charge.