In Canada, a mortgage contract contains all the conditions that you follow while you have your mortgage. You are bound to this contract for the TERM of your mortgage, which in Canada is typically five years.
However, your mortgage will likely not be paid off within that five year period as the current most common length of a mortgage is 25 years; this is the AMORTIZATION.
So to describe a mortgage, you can say it has a 5 Year Term with a 25 Year Amortization.
MORTGAGE TERM – The length of your mortgage contract.
The Term of your mortgage lays out how long you are committed to the mortgage lender before you can renegotiate the Rate or any of the conditions contained within the mortgage contract.
The most common Mortgage Term length in Canada is five years, but they range from 6 months to 10 years.
The most critical conditions laid out in the mortgage contract are:
- The Interest Rate
- Rate Type (Fixed or Variable)
- Pre-Payment Privileges
- Penalties for breaking your mortgage
- Mortgage Portability
- Mortgage Assumability
- Whether your mortgage is a Collateral or Non-Collateral Mortgage
Once you sign your mortgage the conditions laid out in the contract are enforced for the length of the Term and can not be changed until the Term expires.
The Rate is typically linked to the Term, the longer the term e rate, the higher the interest rate will be.
Usually 3-6 months before the end of your mortgage term, you can start to negotiate with your current mortgage lender or even a new lender for the conditions that will be included in your next Term.
MORTGAGE AMORTIZATION – The amount of time it will take to pay off your mortgage in full.
The amortization refers to the amount of time it will take to repay your mortgage fully.
In Canada, the maximum amortization is 25 years while some lenders may extend this to 35 years if you have more than 20% down payment.
Default Insurance Premiums are impacted by the amortization, and you can be charged more for amortizations that are greater than 25 years.
The amortization, along with Rate are the primary factors that determine your mortgage payment.