Sometimes when you’re reading about mortgage financing or talking to a banker or mortgage broker, it seems like they’re talking in a different language. They may be using terminology that you’re unfamiliar with.
Here’s a short list of the most common words or phrases you might come across.
Mortgage term and amortization often get mixed up. Amortization is the number of years that it would take to pay your mortgage off to zero if the payment and interest rate were the same all the way through. For us today, the amortization is most commonly set at 25 years. So if you started out today with a $500,000 mortgage, the payments would be set so that your balance would be zero $$ at the end of 25 years.
The mortgage term is the number of years that the interest rate is fixed for. The most common term is five years although it can range from one year to even seven or ten years. Even variable rate mortgages have a term associated with them - usually three to five years.
The interest rate can be either fixed for the term, or variable meaning the rate would fluctuate with the Bank Of Canada rate. In either case payments are based on a 25-year amortization and include both a principal repayment portion and an interest payment. There’s usually a significant difference between the bank’s posted rate and their discounted rate - usually almost a full 2.0% - for a five-year term.
Interest rates that you qualify for may also vary with your credit score. A score below 680 will cost you more than if your score is higher. It’s best to talk to your bank mortgage specialist or a mortgage broker to learn what rates you may qualify for.
Often some consumers think that the interest rate is the ONLY determinant to getting a mortgage but that may be short sighted depending on your circumstances. Discharge penalties may be relevant if you want to pay the mortgage off before the term is up. These can vary from as little as three month’s interest to many thousands of dollars based on the balance of the term remaining or a difference in interest rates between what your mortgage is versus what the market is offering at the time of discharge.
Bridge financing has become very important in the market today when someone is selling their existing property and buying a new home at the same time. It’s usually for a short term from a few days to several weeks and allows the buyer to take possession of their next property before the closing of their existing house or condo. Bridge financing will provide the funds for the entire purchase of that next home.
The borrower will typically pay the lender a set-up fee for the bridge plus interest on the entire loan borrowed for the few days or weeks until the original home closes. Once that existing home transfers over to the new owner and the sale funds are received, then the bridge loan is paid down and the final mortgage is put in place.
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