You may be understandably confused if you’ve started to research mortgages in preparation for buying your first home, to renegotiate your current mortgage or perhaps to remortgage your existing home. Thoroughly understanding the ins and outs of mortgages takes many years of experience and education. We’re not even going to try to cover the topic in this short article.
Instead, we give short explanations of some of the common words you’ll come across and then point you in the direction of some excellent web resources that explain the ins and outs of mortgages and provide some useful tools.
The principal is the amount that you borrow for any loan, including a mortgage. This doesn’t include the interest.
Interest is the money paid by a borrower to a lender for the use of their money. The interest is usually paid in regular installments along with the principal payment.
The mortgage interest rate is the amount of interest charged by the lender and is expressed as a percentage annual rate of the total borrowed; e.g. 4% per year.
The amortization period is the length of time it will takes to pay off the entire amount of the mortgage, both the principal and the interest. Don’t confuse this with the term of the mortgage. The most common amortization period is 25 years.
Mortgage term is the length of time your mortgage contract is for. The term is usually for between 6 months and 5 years.
This is a regular, scheduled payment to the mortgage lender consisting of the calculated interest plus a set part of the principal amount.
To be pre-approved for a mortgage means that you have a letter from your lender stating that you are pre-approved on certain terms (amount, down payment etc). It also lists any requirements that you must meet to get final approval.
Financial Consumer Agency of Canada
This Federal government resource really does explain, and very clearly, everything you need to know about mortgages. There’s Mortgages 101 for those buying their first home, sections on renewing and renegotiating your mortgage, welcome advice on how to pay off your mortgage faster, and information on borrowing on home equity and understanding reverse mortgages for the more advanced mortgage scholars. Make this your first stop for all your mortgage questions.
Canada Mortgage and Housing Corporation
The Canada Mortgage and Housing Corporation provides a simple calculator that allows you to figure out how much your mortgage payments will be for a particular mortgage amount, interest rate, amortization period and payment frequency. You can adjust any or all of these to see how the payment amount varies.
While you’re on the CMHC website, check out the rest of the Buying a Home section for practical information on home and condo ownership
All Canadian banks have online Mortgage Affordability Calculators, so check your bank’s website for their version. The CIBC calculator asks you to enter your income, monthly expenses and debt payments and then offset this with your down payment info and the type of mortgage you’re considering, along with the interest rate and amortization period. The result shown is the maximum mortgage amount you can borrow. Playing around with any of these numbers will give a different maximum amount. You’ll also see your monthly mortgage payment for that amount.
For more information on how mortgages apply to your situation, you’ll need visit the local financial advisor at your bank – they know your story.