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Jean Richer & Irene Bilinski
Bilingual Sales Representatives

Mortgages 101 - The Basics

What is a Mortgage?

Most simply, it is a loan given with the specific purpose of buying real estate, with the condition that, should the borrower fail to make payments on time, the lender(s) can sell the property in order to get their money back. Two of the main decisions that a mortgage broker or lender will require of a borrower revolve around amortization and the mortgage term.

What is Amortization?

Amortization is the length of time over which the entire loan (and interest) will be paid off. It is calculated based on the amount owed for the property (the principal) and the interest rates offered by the lending agency. The shorter the amortization period, the higher the monthly payment (but less interest will be paid than with a longer amortization). The most common amortization length is 25 years, but anything from a 10 year to 40 year period is available from most mortgage lenders. When mortgages are higher (because of rising property values), the income/debt ratio requirements may mean a lengthier amortization in order to qualify for a mortgage.

What is a Mortgage Term?

The mortgage term is the period of time during which the contract between the borrower and lender is legally binding. Most banks and mortgage brokers offer anything from a one year to a ten year mortgage term. During this period of time the interest rate is fixed (except with floating variable terms) so that the monthly mortgage payment will remain the same for the length of the mortgage term.

Traditionally, borrowers decide on a shorter mortgage term if they think interest rates will go down soon, or if they expect that their financial situation will be stronger by the end of the mortgage term (allowing them to negotiate a better rate or shorter amortization). If interest rates are low, most borrowers will take a longer term from the lender.

At the end of the mortgage term, borrowers can renegotiate with the original lender, or they can decide to seek out better terms with their mortgage brokers or other banks. At this point, the original lender is not legally obliged to renew the mortgage. If Ottawa property values have gone down, or if the borrowers credit rating or financial situation has become riskier, it may take time to find an Ottawa mortgage lender who will grant a new term for the particular piece of real estate.