Making Sense of Mortgages: Finding The Right Rate & More

Home School Building 101

There are a lot of fun steps to buying a new home. Touring show homes, getting to know new communities, and picking your interior selections are among them. While figuring out the best mortgage for your needs is not one of the most exciting parts of buying a new home, it’s one of the most important.

For those who don’t know, a mortgage is a loan on the amount one owes on their home after making their down payment. It’s paid back to the lender, typically through bi-weekly or monthly installments. The choices you make on a mortgage determine your level of risk, and timeframes around paying the rate you accepted, and how soon you’ll have your home paid off. You’ll also be able to decide if your mortgage has the flexibility to shorten the path to the glorious day that you’re mortgage-free.

The first thing you’ll want to do is connect with a mortgage advisor you can trust. Beyond scrolling through Google reviews and asking relatives for ideas, most home builders are well-versed on people in the mortgage industry and can point you in the right direction. While these advisors can help you wade through lender jargon and suggest a mortgage that matches your priorities, get a feel for the types of decisions you’ll need to make ahead of time. Here are some things to consider when making choices about your mortgage:

Pre-Approval vs. Approval

Obtaining a pre-approval letter is typically the first step many will take in their home buying journey and is often required by a realtor before conducting any showings.

While pre-approval is important, it is important to remember that it is merely an estimate and not guaranteed approval needed to finalize a mortgage. A pre-approval is based on a financial status inquiry, unofficial credit check, and other presumptive factors that will be confirmed in a formal loan application. Although your pre-approval may not be aligned with your official approval, it is a valuable resource to manage expectations and provide an estimated budget.

How Much Should I Put Down?

Your minimum down payment is directly tied to the price of the home. If it’s less than $500,000, you’ll need to pay at least five per cent of the purchase price. For anything between $500,000 and $999,999, it’s five per cent of $500,000 and 10 per cent on the balance.If you can make a large down payment, it will be worth your while.

This can help you dodge default insurance, and shrink the size of your loan, which means less interest owed. Anyone who pays less than 20 per cent, requires a high-ratio mortgage. This comes with mortgage default insurance that’s typically added to the principal, which is the amount borrowed and needs to be paid back. Mortgage default insurance ranges between 2.8 and four per cent of the mortgage.

Amortization Periods

Most people want to finish mortgage payments as soon as possible. Your monthly spendable income will help determine this.

The length of amortization has a direct impact on the cost of your required mortgage payment. Shortening the timeframe increases the payments. However, a shorter amortization means less interest paid to the lender in the long run.

While it’s possible to land a 30-year mortgage in Canada, those who need CMHC insurance coverage top out at 25 years. Ask your mortgage advisor about prepayment options, which allow you to pay down the principal ahead of schedule.

Finding The Right Rate

Comfort level plays a big part in this decision. Does change make you uneasy?

If you prefer something stable and secure, a fixed-rate mortgage is the best route. This locks in your interest rate over the term of the mortgage and keeps your costs predictable.

When you can stomach some fluctuation in exchange for potential savings, variable rates make sense.The variable may shift when the index it’s connected to changes. However, if the variable interest rate decreases, more of your mortgage payment goes toward knocking down that principal.

In many cases, people with a variable rate mortgage can change lanes to a fixed rate before the mortgage expires. Get your mortgage advisor’s thoughts on this. Mortgage terms in Canada range from six months to 10 years.

Open vs. Closed Mortgages

Sometimes a large sum of money can arrive unexpectedly. This may come through an inheritance, or sale of a business or vacation home. In that case, many people would want to pour those extra funds into their mortgage. This is where an open mortgage comes into play.

Open mortgages allow borrowers the flexibility to make a lump-sum payment whenever they please. This comes with a minimal fee or no penalty at all. This type of mortgage also lets borrowers increase their regular payments with little to no penalty. The downside is that open mortgages have higher interest rates than their closed-mortgage counterparts.

Making Payments

When setting up the frequency of your mortgage payments, there are a few things to keep in mind. For people who receive bi-weekly pay cheques, bi-weekly payments may be more attractive. On a bi-weekly schedule, there are 26 payments per year, putting the borrower on a faster track to paying down their mortgage than if they were paying monthly.

Borrowers can speed things up even further by choosing an accelerated weekly or bi-weekly payment setup. By doing this, your payments are on par with an additional monthly payment each year.