Buying a home can be an exciting experience! And if you’re like most Canadians, you’ll need a mortgage to help you pay for this large expenditure.
How do you choose the right mortgage for you? Where do you even begin to look?
We’ve got your crash course in mortgages so you’re prepared for the big day when you find the home of your dreams!
What is a mortgage?
You may have saved up some money to put towards a house. This is called your down payment. To cover the remaining costs of the home purchase, you will need help from a lender. A mortgage is a secured loan that you get from a lender to help pay the balance owing on this house.
Learn more about How Much To Save For Your Down Payment.
Unlike most loans, you should note that:
- you’ll need to qualify for this mortgage and pass a “stress test”
- a down payment will be required
- you’ll need to renew this mortgage several times before the debt is paid in full
- if you break the mortgage early you will be required to pay a penalty
Five Things To Consider When Getting A Mortgage
Every lender will have different options for you to choose from. Make sure you’re well educated on what these features are before selecting a mortgage.
1. Your Principle Amount
This is the amount of money you intend on borrowing from the lender. Typically, it is calculated by:
- The purchase price of the home minus the down payment you are providing
- Mortgage loan insurance if your down payment is less than 20%, or if it’s required by your lender
2. Amortization Period
Each month, when you make your mortgage payments, you’ll be paying off some of the principle amount as well as some interest on the loan (as well as mortgage loan insurance if applicable). The amortization period is the length of time it will take you to pay off the mortgage in full.
Amortization periods can vary in length, but the longer your amortization period is, the less your monthly payments will be. However, keep in mind that the longer you take to pay off your mortgage, the more interest you pay in the long run.
REMINDER: If you make a down payment that is less than 20% of the purchase price, the longest amortization period you are allowed is 25 years.
3. The Interest Rate & The Term
Just like any other loan, the interest rate is the fee you pay your lender for using their money. The higher the interest rate, the more you’ll pay each month in mortgage payments.
Your mortgage rate is negotiable, depending on some important factors:
- your credit history & current credit rating
- if you’re self-employed
- the current posted rate by your lender
- the type of lender you choose (bank, credit union, mortgage investment company etc.)
- the length of your mortgage term
Your mortgage term is the length of time your current loan contract is in effect. Terms can range from just a few months all the way up to 5 years. At the end of each term, you’ll renew your mortgage if you can’t pay off the balance in full.
You’ll also note that your mortgage term has an effect on
- your interest rate and the type of interest you can get (fixed vs. variable)
- any penalties you may have if you decide to break the mortgage earlier than expected
- how often you need to renew your mortgage
4. Fixed vs. Variable Interest Rates
You may have heard the term “locking in” a fixed rate. This means when your mortgage term begins, you are committing to a single interest rate that will stay the same throughout the duration of your term. They are usually higher than a variable rate, but you can rest assured that your payments will be consistent each month.
Conversely, with a variable rate, your interest rate will rise and fall with the Bank of Canada. Your adjustable payment will change if the rate changes.
Lenders may also have some other options for rates. Ask your mortgage lender about “Hybrid or Combination Rates” and “Fix Payments with Variable Interest Rates”. They will help guide you to decide which will work best with your financial situation.
5. Payment Frequency
While many people choose to pay their mortgage once a month, you do have the option to make payments more frequently (and therefore pay off the mortgage sooner!). Accelerated payment schedules mean you can save thousands in interest over the entirety of your loan!
- Monthly: means you make only one payment per month
- Semi-Monthly: means you make a two payments per month (monthly payment ÷ 2)
- Bi-Weekly: means you make one payment every 2 weeks (monthly payment x 12 ÷ 26)
- Weekly: means you make a payment every week (monthly payment x 12 ÷ 52)
Other Options To Consider
Most mortgage lenders will penalize you if you break the mortgage before the end of a term. Meaning, if you decide to sell your home before it’s paid off, you may owe some penalty fees. There is, however, some flexibility with this depending on the type of mortgage you choose.
If you sell your home and are going to buy another one, a Portable Mortgage allows you to transfer your existing mortgage. This includes the transfer of your mortgage balance, interest rate and terms and conditions. This is just one of many options a qualified mortgage professional can offer you to reduce any penalties you face.
Where to get started?
To begin the process, your best bet is to get Pre Approved for a mortgage by a lender. You may wish to speak to someone at:
- your local bank
- your credit union
- a mortgage broker
Banks and credit unions offer you a variety of mortgage products, but you’ll need to do the leg-work and shop around to negotiate your best rate.
Whereas a mortgage broker does the shopping for you! They will take your credit information and search for the best possible rate given your circumstances. They can also offer you alternative solutions if you don’t have great credit – private lenders may be one way of getting a mortgage if you have been denied elsewhere.
By having a pre-approval on a mortgage, you’ll know exactly what your budget is for the house you want to buy. It’s also very favourable to sellers if they know you’ve been pre-qualified and have your finances ready for purchase.
Reach out for advice!
Whenever you’re preparing to shop for a new home, your real estate agent can be a great resource. We’ll guide you through all those daunting first steps and show you a variety of homes that meet your budgetary needs.