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MORTGAGE INFORMATION
TYPES OF MORTGAGES
Fortunately for buyers, there are a variety of mortgage to choose from. It is in your best interest to
investigate each of them to determine which is the best for your situation. You probably won't
qualify for all of them. In fact you may only qualify for one. But if you qualify for more than one, you
may save yourself money (and worry) in the long term if you do your homework before signing on
the dotted line.
FIXED RATE MORTGAGES - A fixed rate mortgage is where the rate of interest and payment
amounts are fixed for a specific term. This is a good option of you are planning on living in your
home for many years of you are not a risk taker and prefer the stability of knowing how much your
payment will be each month for the term of the loan.
CLOSED AND OPEN MORTGAGES - A closed mortgage agreement does not provide for payout
before the maturity date. A lender may permit early payout of a closed mortgage under certain
circumstances but will charge a penalty for doing so. An open mortgage permits for prepayment /
payout in full at any time without penalty. Many lenders allow you to increase your payments by
20% each year or prepay up to 20% of your loan each year without penalty. Check with your lender
to find out what options are available to you should you choose a closed term mortgage.
OPEN FIXED RATE MORTGAGES - Choose an open fixed rate mortgage when you want the
security and stability of a fixed rate mortgage with the flexibility to pay off your mortgage or make
additional payments at any time without penalty.
VARIABLE RATE MORTGAGES - Choose a variable rate mortgage if you are comfortable trading
the peace of mind that comes with a fixed rate for the potential interest saving of a variable rate.
What a variable rate mortgage, interest rates fluctuate with prime lending rate while your payment
amount remains consistent over the term of the mortgage. If rates go down, a larger portion of the
payment is applied to your mortgage principal, which means you could pay down your mortgage
faster and save on interest payments.
CONVENTIONAL MORTGAGE - A mortgage loan that does not exceed 80% of the lesser of the
appraised value or the purchase price of the property. A mortgage that exceed that limit must be
insured.
HIGH RATIO MORTGAGE - A mortgage loan that exceeds 80% of the lesser of the appraised
value of purchase price of the property. This mortgage must be insured and borrowers must pay an
application fee and the insurance premium (which may be added to the mortgage) to the insurer.
Canada Mortgage and House Corporation (CMHC) - The Corporation of the Federal Government
that provides mortgage insurance to lenders against borrow default, under the National Housing
Act (NHA).
A CASH BACK MORTGAGE could be ideal if you are a first time home buyer with a minimum down
payment of 5%. The amount of money you receive is based on the size and term of your mortgage.
Your cash back is paid on the date your mortgage is advanced just in time to help you cover
immediate expenses, expected or otherwise!
First Time Buyer's can borrow the down payment from their retirement savings. The
Government of Canada has a home buyer's plan (HBP) that allows you to withdraw up to
$25,000 from your registered retirement saving plan (RRSP) tax free if you use it to buy or build
your first home. You'll have to repay this amount back to your RRSP's within 15 years
and there are some other conditions.
HOW TO PAY DOWN YOUR MORTGAGE FASTER
Mortgage rules depend on your lender and the type of mortgage you have but in general there are
three ways you can pay down your mortgage faster: reducing your amortization, increasing your
payment frequency, and taking advantage of pre-payment privileges.
REDUCING YOUR AMORTIZATION
Amortization is the length of time you've committed to pay down your entire loan or mortgage.
In Canada the maximum amortization period is 25 years.
The longer your amortization the lower your mortgage payments will be but the more you'll end
up paying in interest. This is because the principal amount of your mortgage - the original amount
you borrowed - decreases at a slower rate, so more interest is accrued during the longer term.
Reducing your amortization allows you to minimize your interest payments and pay down the
principal faster.
INCREASING YOUR PAYMENT FREQUENCY
You can make your mortgage payments monthly, semi-monthly (twice a month), bi-weekly (every
two weeks), or weekly. Semi-monthly and bi-weekly may seem like the same thing, but in realty,
bi-weekly payments can save you thousands in interest and help you pay off your mortgage years
earlier. This is because with semi-monthly payments, you'll make 24 payments a year (two
per month) with bi-weekly; you make 26 payments a year (half of the year's 52 weeks).
That's two extra payments every year.
While bi-weekly payments offer a significant advantage to monthly and semi-monthly payments,
weekly payments offer only slight additional savings. This is because with weekly payments it takes
six years to slip an extra payment in the rotation, which makes little difference in the long run.
GETTING THE BEST RATES FOR YOUR MORTGAGE
Naturally, you want to get the best deal for the least amount of money. This hold true for mortgage
rates as well.
A lower interest rate means a lower monthly mortgage payment, which can save you money in the
long term. Also it is easier to qualify for a lower payment than a higher one.
You basically have two routes to find the best rate. The first is to do all of the research on your
own. The second is to use a mortgage broker.
DO-IT-YOURSELF
With the advent of the Internet, much of this information is readily available online. Once you have
educated yourself sufficiently about real estate loans, all it takes is the time and energy to sift
through online resources to find the information you need.
Rates change quickly. That great rate you found today might not be there tomorrow. Once you find
the rate you are looking for submit a loan application and lock in that rate.
MORTGAGES - Bi-weekly and weekly payments
Most mortgages have the option to allow payments to be made on a weekly or
bi-weekly basis. This option may be desirable for two reasons. The first is it can
save you money as you can expect to pay off your mortgage about 4 years sooner.
This can save you dramatically over the life of your mortgage. The other reason why
these options are so popular is that if your employer pays you on a weekly or
bi-weekly basis, you can simplify your budgeting by making the payment line up with
the way you paid.
Making Extra payments
Paying extra amounts on your mortgage can make a big interest saving over time.
When we select a mortgage company, privilege payments options are something that
we look for. A 20% privilege payment will allow you to pay off up to $20,000 per year
on a $100 000 mortgage. It is important that the privilege payment also be flexible to
allow you to pay smaller payments on the mortgage and as often as you wish. An
extra $1000 periodically paid on a mortgage can help you become mortgage free
faster.
Reducing the CMHC fees on your purchase
When you require a mortgage for more than 80% of the purchase price of a property,
that mortgage must be insured by Canada Mortgage and Housing (CMHC) or GE
Mortgage insurance. The premium charged by these company`s decreases as the
down payment increases. When you finance your property at 95%, a premium of
3.75% is added to the mortgage. By increasing the down payment to 10% of the
purchase price the premium can be reduced to 2.5%. If you can put down 20%, you
can avoid any additional insurance fee. Depending on your situation there are ways
that you can structure this financing to avoid the CMHC or GE insurance premium.
Advantages of Bigger Down Payments
As mentioned above, when you put a 20% down payment on your purchase you can
avoid the CMHC premium. More importantly the larger the down payment, the lower
the amount of interest you will pay over the life of your mortgage. It is important to
note that it may not be wise to stretch yourself to increase your down payment and
end up borrowing on credit cards or a line of credit at a higher rate.
Short Term Rates vs. Long Term Rates
The options for mortgages available can be very confusing for most mortgage
shoppers. Terms for mortgages vary between variable and fixed rate, 6-month terms
to 10 year terms. Taking a variable or floating rate mortgage can have savings.
Typically the shorter the term or guarantee of the rate, the lower the rate will be.
This does not always happen, depending on the market place and the economy, but
history has shown that short-term rates tend to be lower than long-term rates. The
up side of variable rate is the strong potential for interest rate savings. The down
side is the fact that you are accepting the interest rate risk without a guarantee. If
you are considering a variable rate mortgage you need to look at your own risk
tolerance, and your cash flow available to deal with potential increased payment.
Considering projections of rates and where we see interest rates heading can also
be important in this decision. Make sure you talk to an expert when you are making
this decision.
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