What are your mortgage options?

1. Conventional Mortgage: A mortgage loan less than or equal to 80% (Loan to Value ratio) of the value of the property i.e. a mortgage for $160,000 on a $200,000 home.

2. High Ratio Mortgage: A mortgage loan greater than 80% (Loan To Value ratio) of the value of the property, and therefore subject to mortgage loan insurance (also known as default insurance) available through either CMHC or Genworth Financial Canada. With mortgages insured through either, a one-time insurance premium is added to the mortgage amount.

 

Interest Rate Type

You will have to choose between “fixed”, “variable” or “protected (or capped) variable”.

A. Fixed-Rate Mortgages: means that the interest you pay and your regular payments remain the same throughout the term of your mortgage. There are 6 month, 1, 2 and 3 year (open, closed and closed-convertible) and 4, 5, 7 and 10 year closed terms. This type carries a slightly higher rate but provides the peace of mind associated with knowing that interest costs will remain the same.

B. Variable or Adjustable Rate Mortgages: can have interest rates, and sometimes payments, that change based on changes in the Bank of Canada’s prime lending rate. There are 3, 4, and 5 year terms (open, closed, closed-convertible and capped). Note that borrowers applying for a variable-rate mortgage or a fixed-rate mortgage with a term of less than 5 years must qualify based on the Bank of Canada’s five-year fixed posted mortgage rate.

With a variable rate, the interest rate you pay will fluctuate with the rate of the market. Usually, this will not modify the overall amount of your mortgage payment, but rather change the portion of your monthly payment that goes towards interest costs or paying your mortgage (principal repayment). If interest rates go down, you end up repaying your mortgage faster. If they go up, more of the payment will go towards the interest and less towards repaying the mortgage. This option means you may have to be prepared to accept some risk and uncertainty.

 A protected (or capped) variable rate is a mortgage with a variable interest rate that has a maximum rate determined in advance. Even if the market rate goes above the determined maximum rate, you will only have to pay up to that maximum.

At the end of the term, you may either pay off your mortgage or renew it.

Mortgage Term

The term of a mortgage is the length of time for which options are chosen and agreed upon, such as the interest rate. It can be as little as six months or as long as five years or more. When the term is up, you have the ability to renegotiate your mortgage at the interest rate of that time and choose the same or different options.

 

“Open” or “Closed” Mortgage

An open mortgage allows you to pay off your mortgage in part or in full at any time without any penalties. You may also choose, at any time, to renegotiate the mortgage. This option provides more flexibility but comes with a higher interest rate. An open mortgage can be a good choice if you plan to sell your home in the near future or to make large additional payments.

A closed mortgage usually carries a lower interest rate but doesn’t offer the flexibility of an open mortgage. However, most lenders allow homeowners to make additional payments of a determined maximum amount without penalty. Typically, most people will select a closed mortgage.

 

How frequently are the payments? / What does the Payment Schedule look like?

You have the option of repaying your mortgage every month, twice a month every two weeks or every week. You can also choose to accelerate your payments. For example, for a $250,000 mortgage (5% interest rate and 25 year amortization) choosing an accelerated bi-weekly payment over a bi-weekly regular payment ($727 vs. $670) allows you to pay down your mortgage more quickly. You could pay off the mortgage in just over 21 years and reduce your interest costs by almost $30,000. This usually means one extra monthly payment per year.

Generally, more frequent payment periods will reduce the time it takes to pay off your mortgage and will reduce the total amount of interest you’ll pay.

Monthly 12 payments / year

Semi-monthly 24 payments / year (1st & 15th of every month)

Weekly 52 payments / year

Biweekly 26 payments / year (every two weeks)

How Many Years is The Mortgage Stretched Over?

Amortization refers to the length of time you choose to pay off your mortgage. Mortgages typically come in 25 year amortization periods but can be as short as 15 years and as long as 35 years. Usually, the longer the amortization, the smaller the monthly payments. However, the longer the amortization, the higher the interest costs. Total interest costs can be reduced by making additional (lump sum) payments when possible.

The following example shows how increasing your payment frequency pays off in the long term:

Payment frequency

Payment amount

# of payments each year

Total interest paid

Interest saved

Monthly

one payment each month

$1,052

12

$115,610

Semi-monthly

two equal payments are made each month

$526

24

$115,163

$447

Bi-weekly

you make a payment every two weeks

$486

26

$114,371

$1,239

Weekly

payments made each week

$243

52

$114,168

$1,442

Accelerated bi-weekly

pay ½ of your monthly payment every two weeks

$526

26

$98,640

$16,970

Accelerated weekly

pay ¼ of your monthly payment each week

$263

52

$98,457

$17,153

Example is based on $200,000 mortgage at 4.0% interest on a fixed term, 25 year amortization. Assume same interest rate for the life of the mortgage.
Rate shown is an example only and may not apply to an actual mortgage.

Do I need mortgage insurance?

Mortgage/creditor insurance ensures that your most valuable asset – your home – is protected in the event of death, disability or critical illness. Mortgage insurance is usually mandatory when your down payment is less than 20% of the purchase price of your home. Insurance is available through CMHC, Genworth Financial, and Canada Guaranty. This type of insurance protects the lender.

You will also have to provide proof to the lender that you have home (fire) insurance, and if a newly built home, the “new home warranty”.

Benchmark Qualifying Rates

If you’re getting an insured mortgage, you must qualify at a higher rate. Qualifying rates are used to ensure borrowers can handle their payments if rates go up. In practice, lenders use the qualifying rate to calculate your debt service ratios. Lenders want to ensure that your debt ratios are low enough to meet their guidelines.

For example, suppose you apply for a 3% five-year variable mortgage. Lenders generally make you qualify at their posted 5-year rate (4.69% for example). “Qualify” means that you must prove you can afford a payment at that higher rate.