Monisha Kakkar

Mortgages are a type of loan used for purchasing real estate or leveraging the equity in your home to obtain cash. Upon approval, the loan is repaid according to predetermined terms, which include the interest rate, payment amount, and timeline. Terms and conditions vary from lender to lender, as well as on a case-by-case basis. The specific terms will be outlined in your mortgage agreement.

When you take out a mortgage, your lender registers as a lien holder on your property. If you fail to repay the loan, the lender has the right to seize possession of your property and sell it to recover the outstanding debt.

The mortgage amortization period refers to the duration required to repay the mortgage, inclusive of the interest, which may vary from 5 to 30 years, depending on your affordability. Typically, for a new mortgage, the amortization period is 25 years.

On the other hand, the mortgage term refers to the duration for which you commit to a specific mortgage rate, conditions, and details with your lender. At the end of the term, you can either repay the mortgage or renew it for another term with your lender’s approval. Mortgage terms usually range from 1 to 10 years, with 4- to 5-year terms being the most common.

To calculate the interest on your variable-rate mortgage, you will require the outstanding principal balance, current mortgage rate, and payment frequency.

Firstly, multiply the outstanding principal amount by the mortgage rate that was in effect during that period. Next, divide the result by 365, and then multiply by the number of days in the payment period that the mortgage rate was active.

This method of calculating interest is also applicable in leap years, and interest payments are due on the regular payment dates.

In contrast, for a fixed-rate mortgage, the interest is compounded semi-annually and not in advance.

With an open mortgage, you have the flexibility to make prepayments, either partially or fully, without incurring a prepayment charge. However, open mortgages often come with higher interest rates compared to closed mortgages. Should interest rates increase, it is usually fairly easy to switch to a closed mortgage.

On the other hand, if you prepay a closed mortgage before the end of the mortgage term, you will be required to pay a prepayment penalty fee. For instance, with a fixed-rate closed mortgage, the penalty fee is typically the greater of 3 months’ interest or the interest rate differential (IRD). Conversely, for a variable-rate closed mortgage, the charge usually amounts to 3 months’ interest. Closed mortgages, in general, offer better interest rates than open mortgages.

When you have a fixed-rate mortgage, the interest rate and monthly payments remain unchanged throughout the mortgage term, ensuring protection even if interest rates increase during this period.

On the other hand, if you have a variable-rate mortgage, the interest rate fluctuates based on the changes in a specific financial index, as outlined in your mortgage agreement. While your regular payments may remain constant, a decrease in interest rates will result in more of your payment going towards the principal. Conversely, an increase in interest rates will result in more of your payment going towards interest.