AMORTIZATION. FIXED/VARIABLE RATES. HIGH RATIO. PRINCIPAL
MYSTIFIED BY MORTGAGE-SPEAK? YOU’RE NOT ALONE.
HERE ARE THE MORTGAGE BASICS TO HELP GUIDE YOU THROUGH ONE OF LIFE'S BIGGEST DECISIONS
LONG OR SHORT TERM
The term is the period of time to which you pay your mortgage at a specified interest rate. Decide how important a stable mortgage payment is to your budget.
Right now, interest rates are low. If you’re afraid they’ll go up and want to lock in at a low-rate, or you want to know exactly how much you’ll be paying every month, go for a longer term like 5 to 10 years.
If interest rates look like they’re falling and you’re comfortable with payments that may fluctuate somewhat, your best bet is a shorter-term mortgage like a 6-month variable-rate mortgage that gives you the flexibility of converting to a longer-term and locking in whenever you want.
The amortization is the number of years (15, 20, 25) it would take to pay back the loan based on a fixed payment amount.
The longer the amortization, the more interest you’ll pay. You can shorten your amortization by increasing your payments, paying lump sums towards the principal, or renewing your loan at a lower rate.
FIXED OR VARIABLE RATE
A fixed-rate mortgage means you pay a set amount every month for the term of your loan. Whether posted interest rates rise or fall, your payments won’t change.
With a variable-rate mortgage, your interest rate fluctuates with your lender’s prime lending rate. It offers more flexibility, but also more risk. Typically, you pay a set amount every month, but when rates fall, more cash goes to principal, which reduces the interest you’ll have to pay in the long term.
If rates go up, however, your set payment may not be enough to cover interest and principal, so you could end up having to pay more.
CLOSED OR OPEN MORTGAGE
In an open mortgage, you can repay your loan any time without penalty. So if you sell another property or come into some extra money, you can pay down your principal whenever you want. Interest rates for open mortgages tend to be higher than for closed, and terms are typically shorter.
A closed mortgage is less flexible. If you decide to pay off a big chunk of your principal, you could incur a penalty. However, even closed mortgages have pretty generous prepayment options (usually up to 20% of the principal per year).
HOW OFTEN TO MAKE PAYMENTS
How often you make mortgage payments is up to you. Choose to pay monthly and you'll make 12 payments a year, opting for bi-weekly payments is a total of 26 and is the equivalent of 13 payments a year instead of 12.
You probably won’t notice much of a difference in your cash flow, but you’ll pay off your mortgage faster, and save yourself thousands in interest.
HIGH-RATIO OR CONVENTIONAL
This depends on the size of your down payment. A conventional mortgage is a loan that covers up to 80% of the purchase price, and doesn’t need to be insured against default.
A high-ratio mortgage is anything over 80%, and must be insured by the Canada Mortgage and Housing Corporation (CMHC) or Genworth.
You can add your insurance premium (a percentage of the loan amount) to your mortgage or pay it on closing.
Find out how much you’re eligible to borrow before you start looking. You’ll know exactly how much you can afford, and you’ll be guaranteed the interest rate that’s available at the time of your pre-approval for 60-120 days.
If rates go up, you won’t have to worry about paying more, and if they go down, you get the lower rate. It’s win-win, free and there’s never an obligation to go with that lender.
Now that you’re armed with some mortgage knowledge, you’ll be able to choose a loan that best meets your needs.
If you need more info, most lenders have helpful information on their websites, or you can always ask us for help understanding the ins and outs of mortgages.