Posted by: islamicfinancingnews | October 20, 2012

Understanding different terms when it comes to Islamic mortgages

Many potential homebuyers, including practicing Muslims applying for Islamic mortgages to finance their home purchase, wonder about the difference between a mortgage term and an amortization period. The first refers to how long you are bound to a specific mortgage rate and the terms and conditions set out by the lender you’ve chosen, while the latter refers to the amount of time it takes for you to pay off your mortgage in full.

The mortgage term you choose is linked to the mortgage rate with shorter terms generally associated with lower rates. For most people, a five year term with a 25 year amortization period is standard. At the end of each term, you are obligated to renew your mortgage at a new rate on the remaining principle owing until the end of the amortization period (25 years) when the mortgage is paid off completely.

In July 2012, the amortization period on CMHC insured mortgages which are required on homes purchased with less than a 20% down payment was reduced from 30 years to 25 years. Shorter amortization periods increase your monthly payments but reduce the total interest payable. On the other hand, a longer amortization reduces your monthly payments over a longer period of time, but you will end up paying more interest as well.

Talk to your Islamic finance lender about the different terms and options that are available and whether prepayment options allow you the flexibility to increase or make additional payments towards the principal of your mortgage without penalty.

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