Home buyers Information - Part 2/6 - Different Mortgage options

What type of mortgage is best?

A mortgage is a loan generally used to purchase property. How much you pay depends on how much you borrow (principal amount), the loan’s interest rate, and how long it will take you to pay it back (amortization period).

There are a few things to consider when choosing a mortgage that’s right for you. 

1. Mortgages can come with either a fixed or variable interest rate.

With fixed rate mortgages your interest rate is locked-in for a specific period of time called the term. Your payments stay the same for that term so you will not pay more if interest rates increase over time.

A variable rate mortgage is just the opposite. The rate of interest you pay is subject to change if interest rates go up or down.  

2.Mortgage can be open or closed.

A closed mortgage cannot be paid off early without paying a prepayment charge.

With an open mortgage you can pay it off at anytime during the term without being subject to an additional charge.

In many cases interest rates for open mortgages will be higher than for a closed mortgage with the same term.

3. Mortgages can be portable.

Portable mortgages allow you to transfer your mortgage from a house you sell over to a new home while keeping your existing interest rate. This may allow you to be able to avoid prepayment charges.

Payment frequency options

The frequency at which you pay your mortgage has to be right for you and your long term goals. You can choose to make payments weekly, bi-weekly or monthly. By switching from monthly to accelerated weekly or bi-weekly payments you can pay off your mortgage faster. Explore all the options for payment frequency with your lender and see how much interest you could save by using Federal Consumer Agency of Canada (FCAC) Mortgage calculator at www.itpaystoknow.gc.ca

Down payments and mortgage default insurance

Your down payment is the portion of the purchase price not financed by your mortgage. You will need to have a down payment of at least 5% of the final purchase price of your home.

Example: Purchase price $200,000 @ 5% = $10,000 down payment.

When you buy a home with less than 20% down payment, the mortgage will need to be insured against default with mortgage default insurance. This insurance protects the mortgage lender in case you are not able to make your mortgage payments. It does not protect you.

Mortgage default insurance generally adds 0.5% up to 3% to the cost of your mortgage depending on the total amount being borrowed. This enables you to purchase a home with a minimum down payment of 5% (10% for multi unit dwellings) with interest rates comparable to those of conventional mortgages.

Tip: Don’t hesitate to negotiate your interest rates and mortgage terms with different lenders. They are all offering you a product and talking to more than one lender helps you make an informed decision.  I can recommend several different Mortgage brokers within my professional network to hekp you find the right mortgage for you.


Information Source:

Financial Consumer Agency of Canada (FCAC)

Canadian Real Estate Association

Canadian Mortgage and Housing Corporation www.cmhc.ca

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