Tips for newcomers: How to choose the mortgage that’s right for you
You’ve decided to begin your search for a new home, or perhaps you have already found the home of your dreams and are ready to make an offer.
For most Canadians, buying a home means taking out a mortgage.
A mortgage is money you borrow to buy a home, using the home as security (or “collateral”) for the loan.
There are many different kinds of mortgages.
There are also many different financial institutions that lend money for mortgages, including banks, trust companies, credit unions, caisses populaires, finance companies and pension funds.
With so many options to choose from, how can you be sure you’re making the best choice for your family?
To help you make an informed decision, Canada Mortgage and Housing Corporation (CMHC) offers the following answers to some of the most common questions Canadians have about choosing a mortgage:
What is the difference between conventional and high-ratio mortgages?
A conventional mortgage is a mortgage loan up to a maximum of 80 per cent of the lending value of the property.
This means that the home buyer has made a down payment of at least 20 per cent of the purchase price or market value of the home.
What is a high-ratio mortgage?
If your down payment is less than 20 per cent of the purchase price, however, you will typically need a high-ratio mortgage. A high-ratio mortgage is a mortgage loan which is higher than 80 per cent of the lending value of the property up to a maximum of 95 per cent. High-ratio mortgages normally have to be insured (by CMHC, for example) against payment default.
What is an assumed mortgage?
An assumed mortgage is an existing mortgage that the seller of the home already has, which you take over as part of the purchase. Taking on an existing mortgage can save you money on the appraisal and legal fees. Plus, depending on whether interest rates are rising or falling, an assumed mortgage could have a lower interest rate than you would get if you negotiated a new mortgage.
What is a pre-approved mortgage?
A mortgage that is already pre-approved for a certain amount, before you even begin looking for a house is known as a pre-approved mortgage. Getting pre-approved for a mortgage can help make your search easier, by telling you in advance exactly how much your lender is willing to loan you to buy a home.
What are fixed, variable or adjustable interest rates?
When you choose a mortgage, you have to decide whether you want the interest rate to be fixed, variable or adjustable.
A fixed rate is locked-in for the entire term of the mortgage.
With a variable rate, the payments remain the same each month, but the interest rate fluctuates based on market conditions.
For adjustable rate mortgages, both the interest rate and the mortgage payments vary based on market conditions.
Talk to your mortgage professional to find out which option is right for you, and be sure to evaluate the impact of an increasing interest rate on your monthly payment.
Should I choose an open or closed mortgage?
With a closed mortgage, you pay the same amount each month for the entire term of the mortgage. Some flexibility to repay principal through lump sum payments is allowed.
Closed mortgages can be a good choice if you want a fixed payment schedule, and you don’t plan on moving or refinancing before the end of the term.
An open mortgage allows you to make a lump sum payment at any time. This type of mortgage can be paid off prior to maturity without penalty. An open mortgage can be a good choice if you are planning to sell your home in the near future, or if you want the flexibility to make large lump sum payments.
An open mortgage generally carries a higher interest rate than a closed one.
What do term, amortization and payment schedule mean?
The term is the length of time (usually from six months to 10 years) that the interest rate and other conditions of your mortgage will be in effect.
Amortization is the period of time (such as 25 or 30 years) over which your entire mortgage will be repaid.
The payment schedule sets out how frequently you will make payments on your mortgage – usually either monthly, biweekly or weekly. Accelerated payments are also an option. These are available for weekly and bi-weekly payment schedules and are generally equivalent to one extra monthly payment per year.
With accelerated payments the home owner is able to pay off his/her mortgage faster while decreasing the overall interest cost.
As Canada’s national housing agency, CMHC draws on more than 60 years of experience to help Canadians access a variety of high quality, environmentally sustainable and affordable homes. CMHC also provides reliable, impartial and up-to-date housing market reports, analysis and knowledge to support and assist consumers and the housing industry in making informed decisions.
How to get the best deal on your mortgage
With interest rates threatening to rise and the real estate market still somewhat uncertain, it makes sense to do all you can to get the best possible deal on your mortgage.
“A written budget that fully evaluates your family’s needs, spending habits and true living expenses is an essential first step,” says chartered accountant Tom Trainor, Managing Director of Hanover Private Client Corporation in Toronto.
He suggests that everyone should understand their personal “optimal capital structure” – the metric that helps businesses define their mix of debt and equity, and how money ebbs and flows in their operation.
Toronto chartered accountant Joe Marchello says that finding an affordable mortgage that leaves you with a comfortable financial cushion or buffer zone should be your goal.
But, he adds, there is a lot more to it than that.
Lending money for mortgages is a competitive field. There are different kinds of players, with some great deals and added perks for qualified customers.
Here are other things that they suggest you consider when shopping for a mortgage.
Broker, banker, other?
If you don’t like to negotiate, a broker will most likely get you a better deal, says Marchello.
They will present your case to a number of different financers, who will probably have different mortgage products and deals to offer you.
Other mortgage shoppers may prefer to deal with their own bank or banker. They, too, often have different products and incentives – even promotions from time to time.
Sometimes, the best deals are offered by a combination of builder-and-banker, where a new-home builder’s bank partner discounts rates to buyers, capped for up to 18 months or longer.
Pay-down triggers or perks?
Banks and other lenders often offer incentives to good prospects and customers. But do some calculating before signing-up for the cash-back option which, Trainor says, is usually the least valuable. Instead, look for a better interest rate, or “pay-down triggers” that allow you to repay part of the principal of your mortgage at regular intervals, or to increase payments without penalties.
Monthly, weekly or other?
Don’t underestimate the long-term savings to be had by paying your mortgage down on a weekly or bi-weekly schedule, rather than monthly. The few extra payments each year can reduce the length of your mortgage, and save you substantial amounts of cash over its lifetime.
Insurance or not?
Consider a plan that will cover your mortgage payments in the event you pass away. Mortgage insurance pays out to cover the cost of the mortgage under prescribed circumstances.
– The Institute of Chartered Accountants of Ontario
Posted: Jul 31, 2013