One of the decisions that many homeowners don’t take into consideration that they will have to make is what they want to do to renew their mortgage when their term is up.  One of the key differences between the Canadian Mortgage system and that in the United States is the length of the mortgage term. 

What is a Mortgage Term vs. Amortization?

The Amortization period of your mortgage refers to the total amount of time you will take to pay off your entire mortgage.  Most commonly, this length of time will be 25 years for Canadians.  However, your Amortization period is broken up into “Terms” here in Canada, meaning that you have smaller chunks of time with the Rate and type of mortgage renegotiated at the end of each of those periods.

The Term of your mortgage refers to the portion of the total Amortization time that you have with the current rate (% of interest), and type (Fixed or Variable).  

A very common Mortgage Term over the last few years has been a 5-year Fixed Rate (meaning it will be in effect for 5 years of your total amortization, and the Interest rate will not change – meaning your monthly payment would remain the same for all 60 payments during that 5 year term).  

However, as interest rates have risen quickly, and there is a lot of speculation that they will possibly go down in coming months, many homeowners who are renewing are looking at their options to decide whether they want a shorter term (1-3 years) so that they aren’t “Locked in” to a higher interest rate for a full 5 years, or even a variable interest rate (which adjusts with the direction the rate set by the Bank of Canada monthly).   One of the key decisions at renewal time is your comfort level with risk as you decide what type and length of mortgage you want to renew with.

Regardless of your risk tolerance, it’s important to gather some information before you make the decision at renewal time.  There are some real opportunities to improve your financial situation if you do a bit of homework, talk to your REALTOR and your mortgage broker, and decide what is best for you and your family!