Choosing A Mortgage "Term"
Whistler Real Estate Co Ltd, #137- 4370 Lorimer Road, Whistler, BC V0N 1B4
Canadian fixed rate interest rate terms are usually closed interest rate contracts - closed for the term selected; ie 1 to 10 years (sometimes up to 25). The term you choose is different from the amortization period. The term is the length of time the interest rate remains the same, and the amortization is the length of time the mortgage payments are calculated for repayment.
The "closed" reference to the interest term refers to prepayment penalties to pay the mortgage off before the term expires, or matures. There is an industry standard in Canada for calculating penalties, which is the greater of either 3 months' interest, or the interest rate differential (IRD). The IRD is the bank's loss of interest & replacement cost for the time remaining in the term. So for example, if you take a 5 year fixed rate and pay it off after 3 years either from our your own resources or by sale, the bank will calculate the IRD by comparing your rate with the current rate for 2 years, and charge that on the balance to the end of term. The estimate for 3 months' interest is approximately 2 months worth of payments.
Additionally worth noting is that in the Bank Act, the maximum penalty that can be charged after the 5th anniversary is 3 months' interest - so this is applicable for terms longer than 5 years.
When a term expires or matures, we say that the mortgage is "up for renewal." At the renewal date, you can pay off as much as you like without any penalty or restriction.
Sometimes a guide for choosing the right term is picking one that coincides with how long you think you may own the property, or perhaps it is chosen to time with a maturing investment when you know you will have the funds to apply against the principal.
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