When you get a mortgage, there are three important terms for you to remember.
- Interest Rates
- Amortization
- APR
I have combined these three terms here because they are related, and you will understand them better if I explain them together.
Interest Rate
“Interest Rates” are the price that lenders charge for the use of their money. So, when interest rates are high, it’s because lenders are charging you more to use their money right now.
Again, it’s a trade-off between now and later.
Lenders are only going to give you so much money to use over the next 15-40 years (the life of your mortgage). They work backwards from that figure using interest rates.
If you have a higher interest rate, you have less money to spend now. If you have a lower interest rate, you have more money to spend now.
Amortization
Now I want to tell you about a funny word – it’s one of those words that most people look at and say, “What in the world is that?”
Amortization is the total length of time it will take to pay off your mortgage, assuming your payment and rate stay the same. In Canada today, 25 years is the most common amortization. If you’re a first-time buyer, or you’re buying a newly-built home, you can now qualify for a 30-year amortization on an insured mortgage — and buyers with at least 20% down can sometimes arrange up to 30 years through certain lenders. Nothing beyond 30 years is currently available. The trade-off is real: a longer amortization means a lower monthly payment, but more interest paid in total over the life of the mortgage. It’s worth running the numbers both ways with your mortgage professional before you decide.
The Stress Test
One more thing that catches a lot of buyers off guard: even if a lender offers you a certain rate, you still need to qualify at a higher rate — generally your contract rate plus 2%, or a government-set minimum (5.25% as of this writing), whichever is higher. This applies whether you’re putting 5% down or 50% down. It’s designed to make sure you could still afford your payments if rates rise after you buy, and it’s often the real reason a buyer qualifies for less than they expected.
APR
“APR” stands for “Annual Percentage Rate.” Now that sounds friendly, too, doesn’t it?
The APR is what you get when you add the interest rate and all of the other mortgage costs together and then calculate what the loan will cost you each year, based on all of the fees added together.
Lenders are required to tell you what the APR is on any loan… so that you can know what the real interest rate is.
So when you are calling around looking for the best rates, make sure and ask what the APR is on each loan that you are being told about!
Summary: Mortgage Terminology
- ✅ Interest Rate: The “price tag” for borrowing money.
- ✅ Amortization: The length of the loan. Longer loans = lower payments but higher total interest.
- ✅ APR: The “real” cost. Interest Rate + Fees combined.
Understanding these three terms will help you compare different loan offers and choose the one that fits your financial goals.
