Your mortgage specialist should unpack the terms and lingo associated with your mortgage preapproval. Here’s a head-start to help you understand what we’re talking about:
Term – The amount of time for which the bank has agreed to lend you money (usually 6 months to 5 years) before renegotiating a new term.
Amortization – Length of time required to completely pay off the mortgage, often as long as 25 years. The longer it takes to pay off the loan, the more interest will be paid.
Interest rates – Interest is the cost of borrowing, and the rate indicates the percentage of your total debt that will determine the amount of this cost. Rates fluctuate and can have a great impact on how much you can borrow – the more interest you are set to pay, the less principal you will be approved for!
Fixed vs. Variable rate – A fixed interest rate will remain the same over your mortgage term, regardless of how the prime rate might fluctuate. This option is for those who would prefer to know the exact amount of each payment. A variable rate changes with the prime rate set by the Bank of Canada – it’s a riskier decision since your payments will increase if rates go up. However, if you’re willing to take the gamble, you could save money as long as rates stay low.
Down payment – This is the amount of money you will pay on your home purchase upfront – the larger your down payment, the smaller your mortgage will be. A minimum of 5% of your borrowed amount is required to be approved for a mortgage… so – if you’re purchasing a $250,000 home, $12,500 is required up front.