Kelowna Capital News

Prime Interest: Becoming familiar with mortgage language

To help better understand the language of mortgage terminology, here are some key words that all potential home buyers need to be knowledgeable about.

Portability

With today’s low mortgage interest rates, when either purchasing a home or refinancing your existing mortgage, peace of mind can take the worry out of future interest rate increase concerns.

When a financial institution says you can “port” your mortgage, that means if you decide to sell your current home and still require a mortgage, the current interest rate will follow you to the new property.

For example, if you have just taken a five-year closed mortgage and decide to sell and move to a new property in two years, you do not have to pay out the mortgage but instead transfer it over to the new property, and any subsequent interest rate increases won’t be applied to the new mortgage for its remaining years.

As well, if you have a variable rate mortgage, the rate is generally not portable.

Term

For those who take out a mortgage for the first time,  there often is confusion between the words “amortization” and “term.”

When your lender states the  amortization of your mortgage is 25 years, that is how long it takes to pay off the mortgage debt with a monthly payment. Buyers have the option to accelerate paying off a mortgage by making bi-weekly or weekly payments.

Term refers to the guaranteed time for you mortgage  interest rate before it can change as interest rates go up or down.

The term for a mortgage can be as short as six months to as long as 10 years before coming up for renewal.

Closed vs. open mortgage

Closed mortgages have certain conditions attached to them, such as being allowed to pay a certain amount off beyond the regular payments each year without a penalty being imposed.

The allowable lump sum payment amount is usually 15 to 20 per cent. For example, on a $200,000 mortgage, a 20 per cent annual lump sum can max out at $40,000 each year of the mortgage term.

Paying off the whole term of the mortgage before the maturity date will mean a penalty payout as well.

With an open mortgage, it offers the opportunity to pay off any amount of the mortgage at any time without incurring a penalty. But not being locked in to a set interest rate leaves you susceptible to changes in interest rates from month to month.

When deciding what type of mortgage to take out, think about your financial intentions for the future.

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