A term of mortgage is the period of time an individual commits into a mortgage agreement with a lender towards a mortgage rate, and terms and conditions set by the lender. During this period, the legal parameters such as interest rate, prepayments, etc., are in effect. Both the mortgage lender and the mortgage borrower are legally obligated to the details of the term of mortgage. At the end of the term of mortgage, the borrower can may pay off the remaining balance of the mortgage, renew it or switch lenders. A couple of months prior to expiration, the mortgage holder usually send the borrower the necessary papers for renewal.
The term of mortgages in Canada are mostly short-term mortgages, and are renewed by most mortgage borrowers. They vary in length from as short as six months up to ten months; with five years being the most common term length. For example, a 25-years old mortgage may have a term of five years. The term of mortgage chosen by the borrower has a direct effect on the rate of mortgage.Explore Definition
Term of mortgages less than three years are considered as short-term mortgage; whereas, mortgage with a term of 3 years or more is classified as long-term mortgage. Short-term mortgages generally offer lower interest rates. Short-term mortgages are helpful in improving one’s credit score since successful payment of mortgage and fulfillment of the shorter term can help one’s credit. Though a short-term mortgage have lower interest rate and a lower total interest cost; but it will have a higher monthly payment than long-term mortgage.
The main motivation for choosing a long-term mortgage is financial certainty. The mortgage rate of a long-term is usually higher than the short-term, but in return it secures the borrower by locking the payments and the interest rate for a good period of time. Therefore, if the present mortgage rates are reasonable and the borrower has a specific budget, long-term mortgage is a better option since it would avoid unexpected costs and it would be more profitable in case the mortgage rates increase during the term.