Episode Two: What's the best Mortgage for you?
1. Mortgage INTEREST RATES:
Mortgage interest rates are fixed, variable or adjustable. See below some of the definitions and examples to help you understand which one is better for you.
Fixed: A fixed mortgage interest rate is a locked-in rate that will not change for the term of the mortgage.
Variable: A variable rate fluctuates pending market conditions while the mortgage payment itself remains unchanged.
Adjustable: With an adjustable rate, both the interest rate and the mortgage payment change based on market conditions.
2. OPEN OR CLOSED MORTGAGE:
Closed Mortgage: A closed mortgage cannot be paid off, in whole or in part, before the end of its term. A closed mortgage is a good option if you’d prefer a fixed monthly payment and wish to predict your monthly expenses. However, because there are often penalties or restrictive conditions if you pay an additional amount, a closed mortgage may be a poor choice if you decide to move before the end of the term or if a decrease in interest rates is anticipated.
Open Mortgage: An open mortgage is flexible. You can typically pay off part of it or the entire amount at any time without penalty. This may be a good option if you plan to sell your home in the near future or if you intend to off a large sum of your mortgage loan. Most lenders allow open mortgages to be converted to closed mortgages at any time, though often for a small fee.
Amortization is the length of time the entire mortgage debt will be repaid. Many mortgages are amortized over 25 years, but longer periods are available. The longer the amortization, the lower your scheduled mortgage payments, but the more interest you pay in the long run.
4. CONVENTIONAL VS. HIGH RATIO MORTGAGES:
Conventional Mortgage: A conventional mortgage is a mortgage loan that is equal to, or less than, 80 percent of the lending value of the property. The lending value is the property’s purchase price or market value — whichever is less. For a conventional mortgage, the down payment is at least 20 percent of the purchase price or market value.
High-ratio Mortgage: If your down payment is less than 20% percent of the home price, you will typically need a high-ratio mortgage. A high-ratio mortgage usually requires mortgage loan insurance. CMHC is a major provider of mortgage loan insurance. Your lender may add the mortgage loan insurance premium to your mortgage or ask you to pay it in full upon closing.
5. MORTGAGE TERM:
The term is the length of time that the mortgage contract conditions, including interest rate, are fixed. The term can be from six months up to ten years. Starting on January 1, 2018, the Office of the Superintendent of Financial Institutions (OSFI) has set a new minimum qualifying rate, or “stress test” for all prospective home buyers, even those with a down payment of over 20%.
Before the new, tougher rule, only buyers that had a down payment of less than 20% had to make sure they could pass a stress test. Regardless of how much money you save for a down payment, if you don’t pass the new stress test, the bank won’t give you a mortgage.
Under the new mortgage stress test, potential home buyers need to qualify for a mortgage at a rate that is the greater of two indicators: either 200 basis points (2%) higher than the mortgage rate they qualified for, or the Bank of Canada’s five-year benchmark rate. The actual mortgage payment will still be paid at the negotiated rate, but a higher calculation is used for qualifying purposes.
6. GET WRITTEN PRE-APPROVAL
It is essential and will give you a competitive edge in securing your desired home. Where a seller received two similar offers, one accompanied by a letter that confirms financing pre-approval and another has NO supporting documents, the former offer is considered first.