TL;DR: like a cell phone contract, the term length of your mortgage outlines the key details like interest rate, required payment, etc. Terms can be 6 months to 10 years, but are usually 5 years in length.
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The amount of time you commit to paying regular installments for your home is considered your mortgage term. During the term, your interest rate and required payment amount do not change (with fixed rate mortgages; variable rate mortgages may see changes in payment). The terms and conditions of your mortgage agreement also remain the same during the term. Mortgage terms can be anywhere from 6 months to 10 years. In Canada, the most common mortgage term is 5 years.
If you still owe money on your mortgage when the term expires you will need to renew your mortgage. Canadian home buyers often renew several times during their amortization period.
Choosing a mortgage term
Home buyers will need to select a term that fits with their financial situation, their goals and risk tolerance. If you pick a longer term, the interest rate of your mortgage will stay the same for the term. A shorter term offers more flexibility but also puts the borrower at risk for having to pay higher interest rates sooner.
Consider your situation before you decide on a term. Research has shown that 70 percent of home buyers found themselves selling their homes sooner than they expected. This can put you at risk for having to pay a prepayment penalty fee. If you think there may be a chance you have to sell your home in the next few years, you would be wise to go for a shorter term.
Keep in mind that the term you use will impact the interest rate you pay. Shorter terms usually (but not always, and not as of August 2019) have lower interest rates. Yet, longer terms offer protection from changing interest rates.
Canadian mortgages are now subject to what has been called a stress test. It was put in place by the Office of the Superintendent of Financial Institutions, which is Canada’s federal banking regulator. Before it came into effect on January 1, 2018, only those with a down payment of less than 20 percent – those considered high ratio mortgage borrowers – had to undergo the stress test.
Under these rules, home buyers must be able to demonstrate they could afford the mortgage at a higher interest rate than the one the lender is offering. This new qualifying rate is either higher than the Bank of Canada posted rate or two percentage points more than the rate being offered by your lender.
What if you break your mortgage term?
Sometimes a home buyer finds themselves having to break the term of their mortgage. This can be due to a relocation, refinance or something else. Regardless of the reason, if you do break the mortgage term early there may be a prepayment penalty fee.
However, there are other options rather than breaking your mortgage term. These include porting it to your next property or having the new buyer assume it.