Within the first five years, you will barely shave off the principal amount you owe your lender, as most of what your payments covered was the interest of the loan. This means the terms and conditions of your mortgage agreement with the lender, including the established interest rates, will only remain valid before the end of the mortgage term. After that, you must renew or renegotiate your mortgage under new terms.
You should opt for a short-term mortgage if you intend to secure a lower interest rate for your mortgage in the next few years, or if you have plans to move into a different home eventually. However, interest rate fluctuations may not be favorable to you when the mortgage term ends, which means you might end up with a mortgage that has a higher interest rate.
However, should you decide to change any part of your mortgage agreement, you may be liable to pay prepayment penalties. There are also mortgages with a convertible term. It may initially be a short-term mortgage, but you have the option to convert it to a long-term one later on. Therefore, in exchange for lending you the money you needed, you must also pay for their services in the form of interest. These lenders usually give borrowers the option to choose either a mortgage with a fixed interest rate or one with a variable rate.
Fixed interest rates , in general, are higher than variable interest rates , but they are guaranteed to stay the same throughout the mortgage term. A mortgage with a variable interest rate means the interest you owe your lender will vary depending on the rise and fall of market rates. You may be paying a low interest rate now, but that can change in the future. Given the unpredictability of the market, variable mortgages offer lower interest rates than fixed mortgages.
Some lenders, however, offer hybrid or combination mortgages. In these types of mortgages, a part of your mortgage is protected from market rate fluctuations like in fixed rate mortgages. Hence, if interest rates drop, you still stand to gain some benefit though not as much as a variable rate mortgages usually do.
In Canada, you may choose how often you pay your mortgage, and so, you must make sure that your chosen payment schedule suits you and your lifestyle best. You may decide to pay on a monthly, semi-monthly twice a month , biweekly, or weekly basis. As you can see, mortgages in Canada can get complicated.
This is why it is best that you consult with a trusted mortgage professional who can guide you in securing a loan so that you can buy a new home. After applying for a mortgage, borrowers will need to determine what type of mortgage they would like: open or closed. All mortgages in Canada are either open or closed. Open and closed mortgages have different mortgage terms that dictate what is allowed and what is not, including how often mortgage payments can be made and how much can be paid off.
It is important to evaluate what is important to you and how your financial situation may be in the future when deciding what type of mortgage you would like. A closed mortgage offers lower interest rates in exchange for more prepayment penalties. These mortgage penalties outline the mortgage term and limit how much money can be paid for each payment. Overall, borrowers can have lower monthly mortgage payments in exchange for a longer amortization period with a closed mortgage.
In contrast, an open mortgage provides prepayment privileges at higher interest rates. With an open mortgage, borrowers' monthly payments are not limited to a specific amount of money.
Rather, borrowers can make lump sum payments of their choice to pay off their mortgage faster. These questions will allow you to determine whether you can afford a high mortgage rate for a short amortization period.
Alongside choosing an open or closed mortgage, borrowers will need to determine whether they need to or should purchase mortgage insurance. Mortgage loan insurance is insurance that is designed to protect investors' interests.
If a borrower were to miss a payment or default on their mortgage, lenders would be protected from the financial risks thanks to insurance. Due to mortgage insurance's important role in protecting lenders, most banks require borrowers with a high ratio mortgage to purchase insurance. Although there is the extra risk associated with this type of home loan, individuals can still expect to receive a decent mortgage rate. Contrary to popular assumptions, home loan insurance is not required for all loans.
Conventional mortgages do not require insurance as the large initial payment proves the borrowers' financial responsibility. Additionally, some applicants may only qualify for uninsured mortgages when they are presented with their mortgage options. This type of home loan cannot be insured by default, meaning that it is not possible for mortgage default insurance to be purchased for this loan.
In most cases, mortgages are uninsurable when they are non-owner-occupied properties, have an amortization period of longer than 25 years, are purchases of 1,, or more, or simply don't meet the requirements to be insured. Alongside open and closed, conventional and high ratio mortgages, there are also variable-rate and fixed-rate mortgages In Canada.
These types of home loans detail how payment can be made towards a new property. A fixed-rate mortgage is a mortgage loan that has a fixed interest rate, meaning that it will not change throughout the entire duration of the loan. While fixed mortgages can be beneficial if you receive a low-interest rate at the time of signing, the average current interest rate may change and fall below the mortgage interest rate you've signed on for.
Fixed-rate mortgages are only recommended for anyone who receives a good interest rate or desires stability rather than possible fluctuations. A variable-rate mortgage is a mortgage with a variable interest rate. This means buyers can expect interest rate fluctuations to occur whenever the economy changes.
Although rate changes may seem scary, they can be extremely beneficial. If the average interest rates drop, buyers with variable mortgages can pay lower rates. In Canada, there is a pervasive myth that mortgage interest can be tax-deductible if a self-employed person runs a business out of their home.
Your mortgage term is how long your mortgage contract lasts with a lender. Most people go with a five-year term, but terms can range from one to 10 years. A longer term will usually cost more, but the rate you get is locked in. When setting up your mortgage, you have multiple payment frequency options. What you choose will determine how much you pay, and how often.
The following are your mortgage payment options:. Going with a monthly or bi-weekly payment scheduled can help many homeowners balance their budget. That means you would be paying off your mortgage faster. Whenever you apply for a mortgage, lenders are looking for three major things. As long as you have the following, you should be approved:.
Some lenders are willing to work with borrowers with a lower credit score, but you may have to pay a higher interest rate. Freelancers and low-income individuals can still get a mortgage, but they may need to prove their income or get a co-signer. When it comes to how much you can borrow, most lenders use two calculations to determine the maximum amount you can afford:.
Things such as retirement savings, vacations, and even the cost of having kids need to include in your budget. If you take a bigger mortgage, you might stretch yourself thin when other expenses come up later. Choosing a mortgage is not something that should be done quickly.
You need to look at the different options and see which lenders have the best offers available to you. If you have more questions, seek the advice of a mortgage specialist at your financial institution. Alternatively, consider reaching out to a mortgage broker since they can shop around on your behalf. Barry Choi is a personal finance and travel expert. His website moneywehave. You can reach him on Twitter: barrychoi.
Published July 30, Updated July 30, A mortgage is a loan to buy a home. Once it's paid off, you own the home free and clear.
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