What is a loan term?

Definition of Loan Term

A loan term is the number of months or years you will be making payments towards a loan. In real estate, the length of the loan term helps establish how much you must repay through regularly scheduled payments over this set period of time. At the end of a loan term, the borrower must either repay the loan in full or renegotiate another loan term.

Why is this term important?

In Canada, loan terms can range from as short as six months to as long as 30 years, but most loan terms fall between three and 10 years.

The length of your loan term will depend on what type of mortgage you are applying for, your lender and type of interest rate you want and how aggressively you want to pay down the mortgage debt.

You can change your loan term either through refinancing the loan or by making additional payments, but there may be fines or penalties associated with taking these steps, so talk to your mortgage broker first.

While most residential mortgage loan terms fall between three and 10 years, this does not mean the entire balance of the loan will be paid off during this period of time. The loan term is only a portion of the amortization period, which is the full-length of time used to calculate a large loan repayment. At the end of a loan term, a borrower will either be required to pay the balance of the loan or negotiate another loan term.

Examples of term

In 2016, you bought a home and chose to amortize the mortgage over a 25-year period. To get the best rates, you could negotiate a five-year loan term with your mortgage lender. After five years you could either pay the remaining debt owed on the mortgage debt or renegotiate another loan term.