Buying a new home is exciting. But there are so many factors to consider. Is it in a good neighbourhood? Is it close enough to your workplace? What is the community like? Are there schools and other amenities nearby? But perhaps the most crucial factor is price. Before you buy your dream home, you need to make sure you can afford to make it a reality. Buying a home can be an expensive affair. That’s where mortgages come to the rescue.
A mortgage is a type of loan you can use to buy property, such as a personal home. These types of loans are usually for large amounts and you can repay them over a long period of time. They are a great loan option for homebuyers. You can buy your dream home by paying only a fraction of the price upfront. The loan or mortgage covers the rest of the amount. The only disadvantage of a mortgage is the lender can take possession of the property if you are unable to repay the loan. This is because the property or home itself is the security for the mortgage loan.
Just like a home, there are many factors to consider when opting for a mortgage. Here’s a quick checklist:
- Mortgage Amount
- Loan Length
- Mortgage Term
- Mortgage Type
- Interest Rate Type
- Payment Type
- Payment Frequency
Seems like a lot? Don’t worry. We’ve broken down each of these terms below. That way, when you’re shopping for mortgages you can make an informed decision and know just what you need.
The amount of mortgage you need depends on the amount of down payment you can pay. Your down payment is the amount you can pay upfront. For example, say your desired home costs $250,000. If you have a savings of $65,000 that you can put towards your home purchase, you will need a mortgage amount of $185,000. As per legislation, we can only lend up to 80% of the purchase price or value of your new home. With $65,000 as a down payment, you’re in the clear.
But what if you don’t have enough savings to make the minimum down payment? Say, you have $35,000 in savings instead of $65,000? You can still get a mortgage as long as you get mortgage default insurance (pdf). As a new home buyer, you’re in further luck, thanks to the Government of Canada’s First Time Home Buyer’s Incentive. It allows you to use up to $35,000 from your Registered Retirement Savings Plan (RRSP) to use as a down payment when you buy your first home. This option does come with some conditions though, so make sure to learn more about it before you commit to using funds from your RRSP.
The loan length or amortization period is the number of months or years over which you will fully pay off your mortgage. You can pay back your mortgage sometimes up to 25 years, the maximum period. Remember, it’s better to pay off your mortgage as soon as you can, so you pay less overall interest. But it’s important to choose a suitable amortization period that aligns with your budget and lifestyle too.
The mortgage term is the length of a mortgage contract tied to a specific interest rate. Once your first mortgage term is over, you can get into another mortgage contract. You can negotiate for your new contract to have a different rate, a different type of mortgage rate (more on that below!), or even by a different lender.
If you choose a short term, a smaller part of your overall payment will go towards paying interest. If you spread your payments out over a longer term, a larger part of your overall payment amount will go towards paying interest.
Fixed or Variable Interest Rate
The interest rate on your mortgage can be fixed or variable. A fixed interest rate means that your interest rate will stay the same until the mortgage term ends. Since the rate does not change, you can know exactly how much you will pay as interest and how much of the principal loan amount you will pay during the term. A fixed interest rate is a great (and safe) choice as it lets you predict your mortgage payments and budget for them. But it does have a disadvantage too. If the market rate drops below the rate you have agreed to, you will still have to pay the higher fixed interest rate.
A variable interest rate, as the name suggests, means that your interest rate could change during your mortgage term. This change depends on the market rates and follows the Bank of Canada mortgage rates. A variable rate is a great choice if the current mortgage rates in the market are on the low end. But as the rate changes, you can’t know for certain how much of your payment is going towards paying the interest rather than the principal loan amount.
Closed or Open Mortgage
An open mortgage allows you to make additional payments, called ‘prepayments’ at any time during the mortgage term. But this flexibility comes at a price. Open mortgages usually charge a higher interest rate and have short mortgage terms (as short as six months, in some cases). A closed mortgage term means you will have to pay a fee if you decide to make any changes to your mortgage agreement. For example, if you decide to change your lender, you will have to make an additional payment to be able to do so. While closed mortgages also allow prepayments, they may be conditional.
Fixed or Variable Payment
A fixed mortgage payment means you will pay a specific amount every time you make a payment. If you choose a fixed interest rate, your mortgage payment will automatically be fixed too. But even if you opt for a variable interest rate, you can still go for a fixed payment. The interest rate change will not affect the amount you pay. What will change is how much goes towards paying the interest versus the principal loan amount. A fixed payment, like a fixed interest rate, allows you to plan your mortgage payments.
A variable payment means the amount you pay will change if the interest rate changes. If the interest rate rises, your mortgage payment amount will rise too. This may make it difficult to plan your mortgage payments. But if the mortgage rates dip low, you have the advantage of paying less (at least, till the rate changes again!).
The payment frequency is how often you would like to make mortgage payments. You can choose to pay every month or two or every week or twice a week. You can even opt for an accelerated payment frequency. If you make payments more frequently, the overall interest you pay will be lower. Accelerated mortgage payments allow you to make even greater savings on your mortgage interest. Remember to select a frequency that suits your income, budget, and lifestyle so it does not get too stressful.
Calculating Mortgage Payment
It’s important to check if you can afford to take a mortgage to buy a new home. You also need to figure out a suitable loan or amortization period and payment schedule. And this is before you actually apply for a mortgage. In fact, it’s best to check before you even decide to go mortgage shopping.
The problem? The amount, interest rate, type of interest rate, payment type, payment frequency, loan period, and term - all influence the mortgage you pay on your dream home. So, how do you calculate your mortgage to make a decision? How do you compare how much you’d pay if you choose a fixed rate or a variable rate? Choosing the right option for your dream home mortgage does not have to be a nightmare. You can simply use our handy Mortgage Calculator. Just fill in the details and check what you can afford, how much you would have to pay, and more. You can even compare different scenarios to make the right choice for your specific needs.
Remember, like all loans, mortgages require you to fulfil certain eligibility criteria too. You will need to provide some personal information, proof of employment, and assets when applying for your mortgage. Want a detailed Mortgage Application Checklist? We’ve got one for you right here. As a first-time homebuyer, there are also a number of incentives that make getting a mortgage easier. So, make sure to do your research while mortgage shopping.
Choosing the Best Mortgage for You
Different lenders will offer different terms. Some may offer low-interest rates or attractive mortgage payment options. Others may offer home equity lines of credit or other types of mortgages like construction mortgages. Ultimately, you need to choose the mortgage that meets all your needs. It should give you the security or flexibility you require. But you don’t have to make this decision alone. We’re here to help with all the mortgage advice and guidance you require. Call us at 1.866.446.7001 or send us a message. One of our mortgage specialists will be glad to help you get one step closer to your dream home today.