Mortgage Terms & Tips
This is the third installation in our First-Time Home Buyer blog series, with a final one to follow. It is important to familiarize yourself with the following mortgage terms and tips.
Mortgage Terms
You will have many options when it comes to choosing a mortgage. Your mortgage broker will help you find the mortgage and mortgage lender that best matches your needs. Become familiar with the following terms and options to help with your decisions.
Amortization period: The time you agree to take to pay off your mortgage (usually 25 years).
Mortgage term: The length of time that the options and interest rate you choose are in effect. It can be anywhere from 6 months to 10 years. When the term ends, you can renegotiate your mortgage.
Payment schedule: How often you make your mortgage payments. It can be weekly, every two weeks (biweekly), once a month, or accelerated weekly or biweekly. Talk to your lender to see all possible options.
Types of interest rates:
Fixed-rate—The rate doesn’t change for the mortgage term.
Variable rate—The interest rate fluctuates with market rates.
Protected (or capped) variable rate—The rate fluctuates but will not rise over a maximum preset rate.
Conventional and high-ratio mortgages:
Conventional mortgage—A loan equal to or less than 80% of the lending value of a home. This requires a down payment of at least 20%.
High-ratio mortgage—A loan that is over 80% of the lending value of a home. This means the down payment is less than 20% and will likely require mortgage loan insurance.
Mortgage loan insurance
You'll probably have to get mortgage loan insurance if you have less than 20% saved for a down payment. It protects banks and other lenders against mortgage default risk, just like property insurance protects you in case of loss. In Canada, we have three mortgage default insurers (CMHC, Sagen and Canada Guaranty). These default insurers also have the final say in approving your mortgage application. Insurance premiums on mortgage loans are calculated as a percentage of your total loan amount. In general, the smaller the down payment is, the higher the insurance premiums will be. However, these premiums are typically rolled into your mortgage, so you do not pay them out of pocket.
Tips for planning and managing your mortgage
When financing a home, make sure you’re prepared to deal with any challenges that come up. These can include a loss of income, increased expenses or rising interest rates. The following tips can ensure you’re financially stable through any ups and downs.
Choose a smaller mortgage. Get a smaller mortgage than the maximum amount you can afford. This will lower your monthly housing costs and allow you to deal with sudden changes in your income or expenses.
Evaluate the impact of higher interest rates on monthly payments. With a variable-rate mortgage, even a slight increase in interest rates could significantly impact your monthly costs. Taking the time now to learn how changing rates could affect you may help you avoid financial problems in the future.
Plan to be mortgage free sooner. You can pay off your mortgage faster by making payments weekly or biweekly. You can also increase your regular payment amount or make additional lump sum payments if your mortgage allows it. Talk to your lender to see all possible options. Ask for help if you need it–if unexpected challenges affect your ability to make mortgage payments, contact your lender or broker as soon as possible. We can work with you to solve any temporary financial setbacks.
Stay tuned for the fourth and final blog post in this series… First Home Savings Account.