Hello, and welcome to my first post on mortgage terms. There are A LOT of things to consider when you want to get a mortgage, but jargon, unfamiliar terms, and acronyms can overwhelm getting a mortgage! So I’m here today to run through two of the most important terms with you – I’ll cover some more terms next week.

1. Rate of interest – adjustable (variable) or fixed
2. Mortgage Term

1. Rate of interest

There are basically two choices regarding mortgage rates – you can select a fixed rate or an adjustable or variable rate.

A fixed rate is exactly what it sounds like – it will stay the same for your entire mortgage term (more on that soon!). So if you are quoted a fixed rate of 3% interest on your mortgage, and your mortgage term is five years, you will never pay anything other than 3% for your entire term. A fixed term has a lot of advantages – you always know how much your mortgage payments will be, and you don’t have to worry if interest rates go up. The main disadvantage is that you could have paid less with a variable-rate mortgage if the variable rate is consistently lower than the fixed rate.

A variable rate mortgage is exactly what it sounds like -the rate of interest you pay will vary. It is quoted as being more or less than the “Prime” rate. The prime rate is a set interest rate that all central Canadian banks use to set interest rates for loans and lines of credit.

If you have a variable-rate mortgage, your mortgage rate will change with the prime lending rate. Your lender will quote your rate as prime plus or minus a specific amount, such as a prime of 0.40%. Even though the prime lending rate may fluctuate, the relationship to prime will stay constant over your term.

For example, the prime rate is 2.5% for six months. And the terms of your mortgage indicate you pay prime – 0.40%. That means your actual interest rate for those six months is 2.1%. If the prime goes up – to 3.0%, you pay 2.6%.

The advantages and disadvantages of a variable mortgage are the exact opposite of a fixed-term one. With a variable mortgage, you don’t know what your mortgage payment will be for the length of your term – so if you’re on a fixed income or a worrier, a variable rate mortgage may not be the best option. The advantage of a variable-rate mortgage is that if the prime rate stays low, you may pay less over the long term than you would with a fixed-rate mortgage.

2. Mortgage term

A second phrase you’ll hear a lot is “mortgage term.”  This is the amount of time that you are committed to:

• A mortgage rate (as covered above – this is fixed or variable)
• A lender – this is likely a bank or credit union
• Any conditions set by your lender (e.g. if you are allowed pre-payments – I’ll cover these in my next post!)

In Canada, the most popular mortgage term tends to be five years. After the five years, you can renew your mortgage (unless you’ve paid it off!) with your existing lender or go to a new one (although this can be complicated). The interest rate and conditions you had in the previous term are no longer applicable.

The more you know!

Now you’ve learned what two of the most important terms associated with a mortgage mean:

1. Rate of interest. This is the amount of interest you’ll pay on your mortgage, and it can be fixed (it will never change) or variable (it can go up and down).
2. Mortgage Term – this is the amount of time you are committed to a lender. The most common term in Canada is five years.

Come back next week, and I’ll cover more terms! Let me know in the comments if any of this information is new to you!