Mortgage Smart Tip for Canadian First Time Home Buyers – Mortgage Terms

Buying your first home can be a daunting process including figuring out the right mortgage and options for you.  One part of this is knowing about what Mortgage Term to select.  Here let’s talk about its definition and what it really means, the options available and how do you choose the right one for you?  

Definition: The number of years or months over which you agree to pay a specified interest rate and the lender commits to not changing it or asking for their money back (except in default of course) ! Also refers to whether it is an open or closed term

Options: Terms can be any of the follow:

Lengths:

       6 months, 1 to 10 years

       Up to 25 years for secured lines of credit although fully open

       A term that renews on a specific date the lender sets in the future e.g. could result in a 2 year 6 month term

Open or closed:

       Completely open so even though a length of term is stipulated, you can pay it back in full with no penalty or;

       Completely closed so a penalty is payable by you if you repay early

So how do you select the right one for you?

       Determine which terms you actually qualify for and can select from.  You may be limited to a 5 year fixed term based on recent legislation changes – if you want a 1 to 4 year term or a variable; you typically have to qualify at a much higher interest rate known as the benchmark rate…. This might reduce the amount you qualify for.  I can let you know your options

       Consider selecting your term based on the current trend for interest rates going up or down e.g.:

ü  You might select a 5 year fixed term because rates are starting to go up and you want to “lock in” that lower rate

ü  You might select a shorter term if rates are expected to remain low and aren’t expected to rise

       Consider selecting your term based on any expected changes in your income.  Maybe having a 5 year fixed term at the same rate and payment for the next five years makes more sense and better suits your needs now

       Consider how long you intend to stay in this home, a question we asked earlier.  You might want to align the term with your future moving plans or even possible job relocation opportunities

       You may be expecting to receive a large sum of money soon and want to pay your mortgage off in full or a large part… paying it in full before the term expires may result in a penalty if the term is closed, e.g. selecting say a 2 year term which is when you plan to pay it off in full will save you money and penalty costs!