Three mortgage ideas cause most of the confusion: fixed versus variable, what a pre-approval actually is, and the difference between your term and your amortization. Here they are in plain words. If you already have a mortgage and want to read your statement, that's a separate guide: my guide to understanding your mortgage statement.
Fixed or variable. A fixed rate stays the same for the whole term, so your payments stay the same too. According to the Financial Consumer Agency of Canada (FCAC), it's usually higher than a variable rate for a similar term [1]. A variable rate can go up or down during the term and is typically lower than a fixed rate for a similar term [1]. Some variable mortgages keep your payment the same while the rate moves. FCAC warns this can be riskier than you expect: when rates rise, more of each payment goes to interest [1]. Others adjust your payment when the rate changes [1]. There are also hybrid mortgages, part fixed and part variable [1]. Which one suits you depends on your budget and how much payment movement you can live with. That's a conversation with your lender or mortgage broker.
Pre-approval. A pre-approval is the lender looking at your finances to find the most they may lend you and at what rate. Depending on the lender, you may be able to hold that rate for 60 to 130 days [2]. Expect to provide ID, proof of employment, proof you have the down payment and closing costs, and information about your assets and debts [2]. Two things to remember: it doesn't guarantee you a mortgage, and the pre-approved amount is a maximum, not a target [2]. A lender can still decline once it sees the specific property [2]. FCAC suggests looking at homes in a lower price range so you don't stretch your budget to its limit [2].
Term versus amortization. Your term is how long your mortgage contract is in effect, from a few months to 5 years or longer [1]. At the end of each term you renew, and most people need several terms to pay off a mortgage [1]. Your amortization is how long it takes to pay the mortgage off completely. A longer amortization usually means lower payments but more interest overall [1]. If your down payment is less than 20%, FCAC lists the maximum amortization as 30 years for first-time buyers or new builds, and 25 years in other cases [1]. FCAC notes that the amount you borrow usually includes mortgage loan insurance if your down payment is less than 20% [1].
Open or closed. An open mortgage gives you more flexibility to put extra money toward it, and typically has a higher rate [1]. A closed mortgage typically has a lower rate and usually limits how much extra you can pay each year [1]. Breaking a mortgage early can mean a prepayment penalty [1].
None of this is advice on which mortgage to choose. For that, talk to a lender or broker. For how it fits a purchase, ask me.
Trevor LeVasseur, Licensed REALTOR® · Greg Michie Realty Group