A Guide to Mortgage Terms in Canada

A mortgage term is the length of time you are committed to a mortgage rate, lender and conditions set out by that lender. A mortgage term can vary in length from 6 months to 10 years, with the most popular term in Canada being 5 years.

When your mortgage term expires, you must renew your mortgage on the remaining principal that is owed. Most Canadian homeowners will renew for a new term multiple times through their entire amortization period.

 

Historical fixed mortgage rates by term

From 2006 to Today

How to choose a mortgage term

Choosing the right mortgage term depends on your financial situation, your short-term and long-term goals, and your tolerance for risk. A longer term can help you lock in a good interest rate for a lengthier period of time, whereas a shorter term can give you more flexibility but offers less protection should interest rates rise in the near future.

It’s important to choose the mortgage term that suits your personal circumstances. For example, if you think there’s a possibility that you might have to sell your home within the next few years, choose a shorter mortgage term so you can avoid having to pay a pre-payment penalty fee (explained in more detail below). According to TD Canada Trust, seven out of ten repeat home buyers moved sooner than they thought they would (source), so the chances of you having to break your mortgage term early are higher than you’d think.

Want to see what other Canadian homeowners are choosing? We prepared a few case studies to show you how different mortgage terms suit different personal circumstances.

One thing to keep in mind is that the mortgage term you choose will directly affect your interest rate. Historically, shorter terms have had lower interest rates. The longer the term, the more protected you are from interest rate fluctuations, and there is a premium you must pay your lender for that.

Qualifying for a mortgage

As of Jan. 1, 2018, all federally regulated mortgages in Canada will be subject to a stress test, which was introduced by the Office of the Superintendent of Financial Institutions (OSFI), the country’s federal banking regulator. Prior to this year, only those with a high ratio mortgage (a mortgage with a down payment of less than 20%) were subject to the stress test.

According to the new rules, home buyers must qualify at a higher interest rate than the one given to them by their mortgage provider. The new qualification rate is the greater of the Bank of Canada’s posted rate (currently 5.34%) or plus two percentage points to the mortgage rate offered by your lender (your contracted rate).

For example: Say you’ve been offered a mortgage rate of 3.09% by your mortgage broker or bank.

While that would be the rate you have to pay, the rate you would actually have to qualify at (and hypothetically be required to afford) would be 5.34%.

You can learn more about How to Qualify for a Mortgage through our blog.

 

Breaking your mortgage term

Sometimes personal circumstances change and you find yourself in a situation where you need to break your mortgage term early. There are a number of reasons you could have to break your mortgage term, including relocation, a refinance or another life event. If you break your mortgage term early, you may incur a significant pre-payment penalty fee. Learn more about pre-payment penalties on our cost of refinancing page.

 

Alternatives to breaking your mortgage term

Instead of breaking your mortgage term and incurring the associated penalty, you may be able to port your mortgage to your next home or make have it assumed by the buyer of your home. Learn more about porting and assuming your mortgage in our education centre.