Amortization calculates the amount of time you’ll be required to pay off the principal and interest of your mortgage. The longer an amortization, the lower your monthly payments, but the more you’ll end up paying in interest.
In Canada, 25 years is the longest amortization for insured mortgages, while uninsured mortgages can have lengths up to 30 years. Amortization is different from a term in that it’s the amount of time you are required to pay off your mortgage, while a term dictates certain parameters like fixed or variable over a specific amount of time.
Fixed vs. variable: what’s the difference?
This is one of the biggest decisions you’re going to make when applying for your mortgage. A fixed-rate will keep your rate consistent throughout the term of your mortgage — for instance, if you get a five-year fixed rate of 3.25%, the rate will stay the same for five years. This can be a good choice if you’re worried about the impact of higher interest rates on your monthly payment.
A variable rate, meanwhile, tracks the bank’s prime lending rate and is influenced by decisions made by the Bank of Canada. If the Bank of Canada raises its lending rate, your mortgage rate will increase, and either your monthly payment or the portion of your payment you pay toward interest will rise. (It’s important you ask your broker or lender what will happen in such a scenario.)
Variable-rate mortgages are great in a falling rate environment, as your mortgage rate decreases whenever the Bank of Canada lowers its rate. Also, variable-rate mortgages have lower interest rates than fixed-rates to begin with.
If you’re comfortable with a rate that can change, choosing a variable-rate mortgage can save you a lot of money over the lifetime of your mortgage — as long as interest rates don’t rise too quickly.
Getting the opinion of a mortgage broker or specialist is key in this scenario and I’m connected to some of the best in the city, head over to planwithmike and let’s get you connected.