Buying a home is probably one of the biggest investments you’ll have to make in your life. And there aren’t many people who don’t need to borrow money to do so. This is where a mortgage loan comes into play: a mortgage allows you to buy the property you want and pay it off over a set period of time.
As a result, it is essential for you to know your own needs and to set a budget that won’t compromise your lifestyle or your financial health. This thought process is what will help you determine your borrowing capacity and evaluate the feasibility of your plan.
Before you make any choices, your mortgage broker can make sure you are familiar with some of the key concepts when it comes to mortgages. Your broker can help give you a clear idea of what you need and explain your options. Our advisors at The Mortgage Processing Centre.ca are fully qualified and have extensive industry experience. They are here to guide you throughout the whole financing process and help you find the perfect mortgage for you.
Here are some important things to understand:
An interest rate is a cost, expressed as a percentage, that is charged by financial institutions when they agree to lend you money. For example, if you borrow $10,000 for a year from the bank, and the bank charges you 4% interest, you will have to pay back the initial $10,000, plus $400 interest. This means that the price to pay for borrowing $10,000 was $400. Because interest rates are set based on market conditions, they can vary considerably throughout the year.
Since the amount you are borrowing under a mortgage is much higher, it is important for you to make sure you get the best possible interest rate. When the time comes to take out a mortgage loan, be sure to choose the type of interest rate that best suits your needs
A fixed interest rate is a rate with a percentage that will not vary over the term of your mortgage loan—generally one to five years. Fixed rates are typically a little higher than variable rates, but they are not affected by market fluctuations. This makes it easier to plan your payments since the amounts stay the same from month to month.
A variable interest rate is a rate that varies in line with the market. This interest rate generally follows the Bank of Canada’s key interest rate. If the key interest rate increases, so will your interest rate. Conversely, if the key interest rate drops, your interest rate will also go down. Variable interest rates are typically lower than fixed rates, but you need to plan to keep some funds in reserve so you can absorb any fluctuations.
The amortization of a mortgage is the period it will take for you to pay off your loan in full. The maximum amortization for an insured loan is 25 years, and the maximum for a conventional loan is 30 years. Logically, the longer the amortization period you choose, the lower your monthly payments will be. But here’s the trade-off: a longer amortization means you will end up paying more interest over time.
Before deciding how long an amortization you want, talk to your The Mortgage Processing Centre.ca broker and take the time to compare the different possibilities. This could help you avoid paying a lot of interest.
A payment is the regular amount of money you pay to the lending financial institution to repay your mortgage loan. Depending on the agreement you enter into with the lender, your payment might be monthly, semimonthly or even weekly.
You can also choose an accelerated payment option for significant interest savings. For instance, if you choose to make payments every two weeks, rather than making 24 payments per year (2 payments x 12 months), you can choose to make 26 payments per year (52 weeks divided by 2). This means you’ll make two extra payments each year, all of which will help to pay off your mortgage balance faster. This simple strategy can save you a lot of money!
The term of the loan is the time during which the options you have chosen for your mortgage loan (interest rate and payments) are valid. Terms typically vary from six months to five years. When your term comes up for renewal, you can choose to renegotiate your mortgage loan with the same financial institution at the current interest rate. You can also change your options or keep them as they are. When your term ends, you can also decide to switch lenders if the interest rate and other options are more attractive elsewhere. This is the best time to contact your The Mortgage Processing Centre.ca broker, who is well placed to find you the best offer to suit your needs.
Your down payment is the base amount you have to pay up front, since it is not included in the mortgage loan. It may also be referred to as the initial amount paid. For a conventional mortgage loan, the down payment must cover 20% of the property purchase price. However, if your down payment covers between 5% and 19% of the purchase price, you will also have to pay for mortgage loan insurance. The higher the amount of your down payment, the less you will have to borrow, and the lower the other ensuing costs will be.
In Canada, the two possible types of mortgage loans are insured loans and conventional loans. The difference between the two lies in the percentage of the down payment and the amortization terms available.
A conventional loan requires a down payment of at least 20% of the value of the property and can be amortized with some lenders over a period of up to 35 years.
A insured loan is required when the buyer makes a down payment of less than 20%. In this case, the financial institution is required by law to make sure you take out mortgage loan insurance. This insurance works to the benefit of lenders, by protecting them against defaults on payment, as well as borrowers, by enabling them to become homeowners with a minimum down payment of 5% at the same mortgage rates as for conventional loans. The maximum amortization period for insured loans is 25 years.