Mortgage Term Definition
A mortgage term is the length of time, usually in years, in which the parameters of a mortgage have legal effect.
After the expiration of the mortgage term, the remaining balance of the mortgage will need to be renewed, refinanced or paid in full. Mortgage terms in Canada carry short mortgage terms, and are usually renewed as a matter of course by most mortgage borrowers.
Both the mortgage lender and the mortgagor are legally obligated to the details of the mortgage for the length of its term. A few months prior to expiration, the mortgage holder will usually send the mortgagor the necessary papers for renewal. But neither the bank, nor the mortgagor, is obligated to renew the mortgage terms with each other. At renewal, the mortgagor is free to move their mortgage to another lender if they wish, without penalty.
The mortgage term should not be confused with the mortgage amortization period. The amortization period is the length of time, based on the monthly payment set in the mortgage, that it will take the buyer to completely pay off the mortgage. The mortgage term is much shorter.
Example
Mr. McGillicuddy takes out a $200,000 mortgage with a 5% interest rate, a 30 year amortization period and a 5 year term. The monthly payment will be $1067.38 and it will takeMr. McGillicuddy 30 years to completely pay off the mortgage. The mortgage will end in 5 years, and Mr. McGillicuddy will be required to renew the mortgage, pay off the balance, or renegotiate the terms.
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Typical Mortgage Terms
In Canada Mortgage Terms vary in length from as short as 6 months up to 10 years in both open mortgages and closed mortgages and fixed rate mortgages or adjustable rate mortgages.
In 2013 according to the CAAMP annual state of the residential mortgage market, 82% of homes purchased in 2013 had fixed rate mortgages. The majority of those being 5 year terms.
Effect of Varying Mortgage Terms
Longer term mortgages usually carry a higher interest rate than shorter term mortgages. If the buyer has a long term mortgage, a fixed rate and mortgage rates have risen substantially since issued, the bank cannot increase the mortgage rate during the term, and the buyer benefits over current prevailing rates.
A shorter term mortgage normally has a lower interest rate, but is subject to renewal over a much shorter period, not allowing a buyer to “lock in” a low rate. If interest rates have risen substantially, the mortgage holder will most likely only offer renewal terms at a higher rate, more in line with prevailing rates. If interest rates have fallen, the buyer may seek to obtain the lower prevailing rates, either from the current mortgage holder, or from another financial institution that may offer a lower rate.
A First Foundation, we have found that mortgage renewal is a perfect time to consider the present interest rates and whether better rates are available in the open market. Since we are not tied to a single mortgage lender, we have a wide variety of lenders in which to compare rates, terms and conditions. If your mortgage is coming for renewal, feel free to contact us to determine what is available.
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