Understanding the terms of the mortgage are paramount in choosing the mortgage product that is right for your particular and unique situation. What is the difference between term and amortization? Are terms all the same for every lender? What are the differences of terms from lender to lender? These are just a few of the questions we receive at Dominion Lending Centres when speaking with our clients. In order to gain understanding on “choosing the right mortgage term’, one has to understand the basics.

Amortization – This is different than “the term” of the mortgage. Amortization is usually offered in increments of 25 years, 30 years, and even 35 years. Amortizing a loan is scheduling payments, usually of consistent payment amount, that will pay off the loan in the agreed upon time period. However, in Canada, the lender will agree to loan money to the consumer only for a portion of the amortization period called “the term”.

The Term – Lenders usually offer term contracts for anywhere from month to month up to 10 year terms. Most commonly, consumers will enter into a 5 year contracted term with the lender. But on occasion, 4 year, 3 year and even 2 year terms can offer lower interest rates. In today’s market, where the economy is in a slump, the lower rate terms are attractive to many consumers. However, in order to qualify for the lower interest rates with lesser years (e.g. 3 year contract) the consumer has to be able to debt service at the Bank of Canada benchmark rate (currently 4.64%). This means the lender will punch in all the numbers and see if you can afford this same mortgage if the rate was 4.64%.

Debt Service – Debt servicing is what the lender does to determine if your income justifies the mortgage you want as well as takes into account all the debt (and sometimes the credit) you have. Another name for this is Total Debt Servicing. Essentially, the lender wants to know if you can afford a mortgage and they have calculations that will determine if you can afford the mortgage.

Credit Score – Credit is another important factor in choosing a mortgage. The lender always looks at the consumer’s credit history to see if they have managed their credit well. If your credit score is low due to a life event that was beyond your control and it is a reasonable explanation, the lender will consider your situation. But that consideration doesn’t always result in a mortgage. In fact, your credit score is one of the most important aspects of life that ONLY YOU can manage.

Timing – It’s been said that 70% of mortgages break before the 5 year term is up. This is an important thing to consider when choosing a term. If you feel you are going to sell within the next 4 years then it is important to look at 3 year term options. If you choose a 5 year term and you think you are going to sell in 3 years, you need to realize there are penalties to break a contract term early.

Penalties – Breaking a contract results in penalties. Early breakage can result in thousands, if not tens of thousands, of dollars. Depending on whether you are in a variable rate or a fixed rate, the amount of penalty you pay to break a mortgage will certainly keep you up at night. It’s important to know what the penalty to break your mortgage will be before entering into a contract term.

Clients tend to think that there is an overall BEST term product on the market. But there isn’t! Every individual has needs that are unique to their situation. Claiming there is an ideal mortgage term is like saying the most beautiful colour is blue. Just like everyone has their favourite colour, everyone has an individual mortgage term that works best for them and we here at Dominion Lending Centres can help!

Courtesy of Geoff Lee, AMP – DLC GLM Mortgage Group 

Be it fully loaded or all the bells and whistles, as savvy consumers we want to know that we got every bit of extra awesomeness available to us and your mortgage should be no different. Sure you want the best rate, that’s a given. Wouldn’t you also like the extras which will make your mortgage even better with none of the yucky stuff? Of course you would! Today we are going to look at what the mortgage extras are that you should be looking for and those you should beware of.

1. Portable – Most mortgage lenders offer a portable mortgage. This is where you can take your mortgage with you from property to property without penalty. Not all porting policies are created equal so make sure yours is not going to limit you later on. There are a few things to keep an eye out for. The first is how long you have to port the mortgage to a new property. Some lenders require you to do so on the same day as you sell. This can make it difficult especially if you were hoping for a few days to move from the old home to the new one. Other lenders will put you into two separate mortgage components which means you are basically stuck with your current mortgage provider unless you pay a penalty on one or the other parts. Finally, not all lenders like all property types or can lend in other provinces. For example, if you currently reside in Alberta but plan to move to an acreage in British Columbia, then you should make sure you are with a lender who will allow this move.

2. Pre-payment privileges – There is a wide spread between the lenders on exactly how much extra you can pay on your mortgage. It can vary from 10% to 20% of the principle amount. There is also a wide range of how soon you can start to make those extra payments. Certain lenders make you wait until the anniversary date. If you plan to be aggressive with your mortgage re-payment, then make sure your lender matches your plan.

3. Pre-payment Penalties – I have said a thousand times or more that there is no standard in Canada as to how the mortgage lenders are required to calculate the penalty if you break your mortgage contract early. They are required to present their calculation formula to you before funding, but even to a mortgage professional, these can be darn near impossible to navigate. Do your research and ask a lot of questions to make sure you are not choosing to place your mortgage with a lender at the nasty end of the penalty scale.

4. Collateral Mortgages- A collateral mortgage is where the mortgage lender registers a higher amount on the title of the property than you have actually borrowed. This can be useful later if you want to get a home equity line of credit as it saves you some steps in the borrowing process. The down side is that collateral mortgages are more difficult to switch out at renewal which can leave you stuck with your current lender even if they have a higher interest rate than is available in the market. It also allows your bank to tie in other borrowing such as credit cards and vehicles to the mortgage which may then have to be paid out when you sell leaving you less money to put down on your next home.

5. Easy to use- There is something pretty nice about making extra payments or checking your mortgage balance on a Saturday morning while sipping coffee in your PJ’s. Find out ahead of time what type of online mortgage management you can do if you are part of the new digital world and value such things

Think of your mortgage as a hamburger. The good things above are the toppings you want like cheese and bacon. The negative can be the things you hate like mustard or mushrooms. Your mortgage can be great or it can be yucky but it’s up to you to order it the way you’d like – and we here at Dominion Lending Centres can help!

Courtesy of Pam Pikkert, AMP – DLC Regional Mortgage Group