With interest rates so low, you may be thinking of taking the big step into home ownership, ‘moving up’ or even refinancing your existing home. If so, knowing what’s what with mortgages can save you money now and in the future. Here’s a mortgage primer to get you going.
Many people want the security of knowing they have a pre-approved mortgage before they go house shopping. Having a pre-approved mortgage helps you focus on looking at houses you can afford and provides the security of knowing you meet the financing requirements of the home you are trying to buy.
The down payment decision
Conventional mortgages do not exceed 80 per cent of the purchase price of a house – you supply the other 20 per cent as a down payment. If you don’t have that kind of cash on hand, you can apply for a high ratio mortgage, but it must be insured through Canada Mortgage and Housing Corporation (CMHC) or GE Mortgage Insurance Canada (GE). In this case, it’s important to keep in mind that you need to pay an insurance premium typically in the range of one per cent to three per cent of your mortgage amount.
This fee may be added to the mortgage amount.
Amortization is the number of fixed payments or years it takes to repay the entire amount of a mortgage.
The traditional amortization period is 25 years, but by making higher monthly payments over a shorter amortization period, you’ll pay off the loan much faster and save substantially on borrowing costs.
Accelerated mortgage payment
By making accelerated payments you’ll pay off your mortgage faster. The same is true of lump-sum payments. When you have excess cash, you can use it to reduce the principal amount of your mortgage loan. Most lenders allow a yearly lump-sum prepayment of up to 15 per cent of the original principal amount, and some allow more.
A mortgage term is the period of time for which the money is loaned under the same rate. When the term expires, you have the choice of repaying the balance of the principal still owing or renegotiating your mortgage for a further term.
Open or closed
Determines how much re-payment flexibility you want. An open mortgage allows payment of the principal in part or in full at any time without penalty and tends to be for a short term - usually six months to one year. Since open mortgages offer greater flexibility than closed mortgages, they typically have a higher interest rate. A closed mortgage allows limited pre-payment privileges and a penalty usually applies if you repay the loan in full prior to the end of the term. Closed mortgages typically offer a lower interest rate as compared to open mortgages of similar terms.
Fixed versus variable rate
With a fixed rate mortgage, you can be certain the interest rate will remain the same for the mortgage term, making it easier to budget. A variable rate mortgage may deliver a lower initial interest rate, but this may fluctuate from month to month with changes in prevailing market interest rates. The more rates change, the larger the impact on your monthly budget. Don’t jump into a mortgage – take the time to find the right product for your unique situation. We can help you make sound decisions for your life as it is now and as you wish it to be in the future.
Key points to consider:
When you consider buying your first home, purchasing a new home or even refinancing, it’s important to first understand the mechanics of your mortgage.
Start by making sure you are pre-approved for a mortgage, and think about how much of a down payment you can afford.
Consider the choices of a open or closed mortgage, and fixed or variable rate.
By Linda Hancock, Investors Group Financial Services Inc.
PDF originally published by Investors Group Financial Services INC.