Mortgage Clauses Made Simple

Amortization versus term:
Amortization is the life of the mortgage! It is the time it will take you to pay of the mortgage completely with scheduled payments. 25 years is the standard and the maximum amortization period in Canada.

The term is the time period that the lender and borrower contract to each other with specific mortgage features. This includes the agreed upon interest rate, as well as details on how the interest is compounded and specific clauses on the mortgage pre-payment and penalty terms etc . the Mortgage term typically ranges between 6 months to 5 years, though 10 year mortgages are available. At the end of the term you can renew with the existing lender or move over to a new lender.

Portablity
Allows you to transfer your mortgage over to a new property without cost or penalty. You will need a lawyer to transfer the mortgage and register it on title of the new property. Most mortgages do have a portability feature, but make sure you have the right to blend the interest rate should you need a higher mortgage for the new home.

Assumablity
An Assumable mortgage is a mortgage that a qualified buyer can take over from the current owner of a property.. This is a benefit to the buyer in a market where rates are higher than the existing mortgage rate on the property. If the rate is similar to the current market rate it can be a benefit to the seller if the mortgage is closed, and he would be saving the penalty for canceling the mortgage. This is a simple procedure, requiring an amendment to the title. *Important Note; If you have a buyer assuming a mortgage from you, the bank will ensure that the buyer qualifies to assume the mortgage. Please make sure that you get a letter of release from the bank, guaranteeing that you are not responsible for any default!

Prepayment Privileges
The right to repay more than the scheduled principal payment. In recent years these amounts have become more generous with up to 20% of the principal per year being allowed plus being allowed to double up the monthly payments. There are restrictions on how these payments are made.

Prepayment Penalty
If your mortgage is not fully open, you will be charged a penalty if you want to pay off all or part of your mortgage before the end of the fixed term. The normal prepayment penalty is the greater of three months' interest or the Interest Rate Differential (IRD) on the amount to be prepaid. CMHC (for insured mortgages) and a few of the major lenders set the maximum penalty at 3 months interest after the mortgage has been in effect for three years, regardless of the number of times it has been renewed.

Interest Rate Differential IRD
This is usually calculated as the difference between the existing rate and the rate for the remaining term, multiplied by the principal outstanding on the balance of the term. This can be a high if mortgages rates have dropped significantly.