What Does Term Refer To In My Mortgage Contract?
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There is no such thing as a silly question. Especially when it comes to your mortgage and money! As a mortgage broker I sit down and work with a lot of borrowers, some have a very high level of financial literacy and others never had the opportunity or need to learn. Arranging a mortgage on your home along with being a necessity should also be an educational experience.
When you arrange a mortgage on your home with a lender you are entering into a contract with the lender. Term refers to the length of time that the mortgage contract is effective for. For the term of the mortgage both you and the mortgage lender are obligated to honor the conditions and terms as set out by the mortgage contract. Most mortgages in Canada are arranged for 5 years at a time, however there are mortgages with terms from 6 months all the way up to 10 or 15 years and beyond.
During the term you are making 4 promises to the lender, otherwise known as covenants:
1- You promise to keep up with the mortgage payments
2- You promise to keep the property taxes up to date
3- You promise to keep the property in good repair
4-You promise to keep sufficient insurance coverage on your home
This is not a one way street though, during the mortgage term the lender is also making promises to you:
1- They give you ‘quiet and uninterrupted possession’ of your home
2- They cannot change the agreed upon interest rate during the term
3- They cannot demand that you repay your mortgage before the term expires (unless you break one of your promises)
Most mortgage lenders will allow you to break the mortgage contract before the term is up. This is where the penalty comes in. The majority of mortgage contracts are written so that the penalty is the greater of 3 months interest or the Interest Rate Differential (IRD). I could write a whole post on what to look out for when it comes to IRD. NOTE: Be wary if you are offered a low interest rate that is too good to be true because that is a sign that your mortgage may not be ‘breakable’ and you will be handcuffed to the lender until the term expires or you will have to pay them all the interest that you would have paid them over the term of the mortgage.
What happens at the end of your term you may ask? If you are a good client to the mortgage lender and pay them consistently over the life of the mortgage they will be happy to extend a mortgage renewal to you to enter into another term with them. This is an important juncture in the life of your mortgage because it represents an opportunity for you to refinance, move or paydown or off your mortgage with no interest penalty. It also represents a good opportunity for you to negotiate a lower rate or switch lender. Amazingly 90% of Canadian homeowners take the posted rate renewal offers their banks send them and pay more then necessary in interest.
If you are frustrated or confused about mortgage financing and looking for a guide with patience and who really understands the ins and outs of the business contact…
Chris Molder – Son Of A Broker
Licensed by the Financial Services Commission of Ontario under Lic#M08010066
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Great site
I have a question. I’m currently in a 5 year fixed mortgage, and I would like to break the mortgage contract early so I can re-finance with another lender who is offering a better rate, and the chance to consolidate some debt. However, in my current contract it states that I can only break my contract early if I have been in the contract for a minimum of 3years. Because of the unfortunate state of my finances, I am unable to wait another year for the 3 year deadline, because I can no longer afford to pay the mortgage. Am I completely bind to this contract? Or is there someway out of this situation.
Hi Dimples… Thanks for your compliment & for your great question. I understand exactly what your circumstances are… unfortunately you are bound by the contract with the lender. Sometimes it states that you can break your mortgage only with a bonafide sale… meaning that you have listed and sold your house. Very often I make the comment that it is one thing to get into a mortgage with a lender but it is an entirely different story to get out of a mortgage. This is especially true of “no frill” mortgages or “special offers” from the bank where they offer a discounted rate up front but the contract is written so that you are committed right up until the end of the term. Without knowing anything else about your personal circumstances I would explore the option of arranging a temporary 2nd mortgage to relieve the cashflow pressure and then when your mortgage becomes breakable explore the option of refinancing.