Mortgage Terminology can be confusing at first, so in this article by Madhavi Acharya-Tom Yew, in the Toronto Star, terms are made much easier to understand.
“There are three basic parts to a mortgage: the amortization, the term and the interest rate, which could be fixed or variable.
Amortization: This is the total number of years it will take to pay off your mortgage completely. The maximum is 25 years. The longer the amortization, the lower your monthly payments, but you’ll end up paying more interest over the life of your mortgage.
Term: The term is the length of time you have agreed to a certain interest rate and payment schedule. It can range from six months to 25 years, but homebuyers tend to go for terms of three or five years. Ten-year terms have become more popular recently, because fixed mortgage rates are at historic lows.
Variable rates: The interest rate on a variable-rate mortgage is tied to the bank’s prime rate. The prime rate, in turn, goes up and down according to the overnight rate, which is set by the Bank of Canada. A variable rate mortgage can typically be locked-in at a fixed rate, but sometimes there is a fee. Ask your lender for more details!
Fixed rates: These rates are locked in for the length of your term, and they tend to be higher, but you’re paying for peace of mind. The payments, and the amount of interest that you owe, will not change during the term. These rates are dictated by supply and demand in the bond market, which, in turn, is influenced by world events – anything from the European debt crisis to the health of the Chinese economy to the health of Canada’s manufacturing sector can push these rates up and down – that’s why it’s so difficult even for experts to know where rates are headed.
Open: An open mortgage means you can pay the mortgage down or off entirely at any time without any penalties. These typically carry a higher interest rate.
Closed: A closed mortgage means that you will be restricted to how much of the principal you can pay down ahead of schedule. Most mortgages allow what are known as pre-payments or extra payments towards the principal of about 20 per cent per year. Check with your lender for more details. Some mortgages allow you to double up on your payments.”
First published in the Toronto Star on April 26, 2012.