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.
Mortgage loans are available from a wide variety of financial institutions — and mortgage rates can vary just as widely. It can pay to shop around for the lowest rate but it's equally important to make sure the mortgage you choose incorporates features and benefits — repayment schedule, loan term, and other options explained in this article — that fit your overall financial plan.
Many people want the security of knowing they have a pre-approved mortgage before they go house shopping. If you decide to do this, make sure your rate will not increase if rates rise, but will be automatically reduced if they drop.
The Down-Payment Decision
Conventional mortgages do not exceed 75 percent of the purchase price of a house — you supply the other 25 percent 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). Your monthly payments will definitely be much higher so consider this option carefully. Becoming "house-rich and cash-poor" can cause significant money and emotional stresses.
Amortization — Shorter Is Better
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 that much faster and save substantially on borrowing costs.
Flexibility Can Save You Money
Try to include the option of changing payment frequency or of increasing the amount of your monthly payments (preferably with no fee). 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 10 percent of the original principal amount, and some allow more.
Open Or Closed — To Gamble Or Not
An open mortgage lets you pay off as much as you want, any time, without penalty. But, open mortgage rates usually have higher rates (sometimes much higher) than closed mortgage rates. However, a closed mortgage can't be prepaid in full, renegotiated or refinanced during its term.
And Speaking Of Terms
A mortgage term is the period of time for which the money is loaned under the same rate terms. 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 at the then-current interest rate.
When interest rates are low, it's usually advantageous to "lock in" a long-term fixed-rate mortgage. But, when there's a significant difference between short-term and longer-term mortgage rates, it can be a worthwhile strategy to take the shortest term possible — six months or one year — and assess your options at its conclusion.
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 will fluctuate from month to month with changes in prevailing market interest rates.
Don't jump into a mortgage — take the time to find the right product for your unique situation. A professional financial planner can help you make sound decisions for your life as it is now and as you wish it to be in the future.
This column is presented as a general source of information only and is not intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice.