Mortgage term versus amortization period
The mortgage term is the period covered by the current mortgage contract and interest-rate conditions. At the end of the term, any remaining balance normally needs to be renewed, refinanced or paid. The amortization period is the estimated time required to repay the mortgage in full using the scheduled payments.
One mortgage can therefore have several terms during its amortization. A longer amortization generally lowers the scheduled payment but increases the time interest is charged. The Financial Consumer Agency of Canada explains these differences in its mortgage term and amortization guide.
How Canadian mortgage payments are calculated
A repayment mortgage applies each payment to interest and principal. Early in the amortization, more of the payment generally goes toward interest. As the balance declines, a greater share goes toward principal if the rate and payment remain unchanged.
Canadian mortgage contracts can use specific interest-compounding conventions. Payment frequency can be monthly, semi-monthly, biweekly, accelerated biweekly, weekly or accelerated weekly, depending on the lender. A true accelerated schedule typically pays the equivalent of an extra monthly payment over a year, but confirm the lender’s calculation and contract terms.
Fixed and variable mortgage rates
A fixed rate generally stays unchanged during the mortgage term. A variable rate can change during the term. Depending on the product, the payment may change when the rate changes, or the payment may remain fixed while the portions going to interest and principal change.
For a fixed-payment variable mortgage, rising rates can slow principal repayment and may lead to a trigger rate or other contractual consequences. Review the lender’s disclosure for how rate changes affect the payment, amortization and balance.
Down payment and mortgage default insurance
The down payment reduces the amount borrowed and determines the initial loan-to-value ratio. When the down payment is below the applicable threshold, the lender will generally require mortgage default insurance. This insurance protects the lender, although the premium is commonly passed to the borrower and may be added to the mortgage.
Minimum down payments, insured-mortgage price limits and amortization eligibility can change. Review current CMHC mortgage loan insurance guidance and confirm the requirements for the property and borrower.
The Canadian mortgage stress test
A lender may need to qualify a borrower using a rate higher than the contract rate. For uninsured mortgages at federally regulated lenders, OSFI publishes a minimum qualifying rate based on a buffer and a floor and reviews it periodically. The qualifying payment is used for underwriting and is not necessarily the payment charged under the mortgage contract.
Because the qualifying-rate formula can change, check the current OSFI minimum qualifying rate. Other rules or lender policies may apply to insured mortgages, renewals, switches and different institutions.