If you’re about to buy your first home and are shopping for a mortgage, you have many options from which to choose. Variety allows you to find a mortgage that meets your financial and lifestyle needs.
For instance, is your household income consistent or does it change? Do you expect the number of people in your household to change while you’re paying off your mortgage? And do you expect to stay with your new home during the payment period, or buy a new one?
If you’re financially ready for home ownership, the right mortgage can meet your needs, but it’s important to understand your options. Here are some of the most common ones:
Length of the payment period: Most people want to pay down their mortgage as quickly as possible, but a shorter payment period — called the amortization period — also makes for larger regular payments. Most lenders offer amortization periods ranging from 15 to 25 years.
Open or closed mortgage: A mortgage that allows you to pay off your mortgage in part or in full at any time without penalty, or to renegotiate the mortgage at any time, is called an open mortgage. A closed mortgage will apply penalties for early or additional payments, but usually involves a lower interest rate. Most lenders allow homeowners with a closed mortgage to make additional payments of a determined maximum amount without penalty. Most people select a closed mortgage.
Payment schedule: You have the option of repaying your mortgage every month, twice a month, every two weeks or every week. You can also choose to accelerate your payments, usually by making one extra monthly payment a year.
Interest rate type: Most lenders advertise the interest rates at which they’re willing to lend money. But those rates can change and that can also change how you pay off your mortgage.
If you choose a fixed-rate mortgage, the interest rate will stay the same, giving you peace of mind that your regular payments are gradually contributing to your equity. On the other hand, a variable-rate mortgage will change as the market does, which involves some risk that your payment period will lengthen — or shorten, if interest rates fall — but these mortgages often come with a lower overall rate. A third option allows you a variable rate that is capped to a maximum, shielding you from the biggest changes to the market.
For closed mortgages, these conditions apply during the mortgage term (this is a period ranging from a few months to more than five years). After each term, you can renegotiate your mortgage rate, for example, by choosing a lower interest rate if one is available in the market, or by changing your payment schedule.
To learn more about your mortgage options, CMHC’s Homebuying Step by Step: A Consumer Guide and Workbook will lead you through the home buying process in five simple steps. The guide also provides tools, including a mortgage calculator, to help you estimate costs in advance. Download your free copy of the guide at www.cmhc.ca under the buying a home section.