- Buying a home is not a frivolous decision. It is important to take your time before deciding on the type of mortgage to take out.
- Compare the offers to find the loan that best suits your needs and make sure you understand the conditions before signing the contract.
Buying a home is a major financial commitment, perhaps the biggest you will ever make. Hence the importance of taking your time. When choosing a mortgage, many factors should be considered, including the value of the mortgage, the amount of the down payment, the amortization period (time required to pay off the entire loan), the mortgage term (duration during which the terms of the contract continue to apply) and what suits you best, a loan with a fixed interest rate or a variable rate. Banks provide consumers with the information needed to make an informed decision and answer their questions throughout the term of the mortgage contract.
Find the right mortgage
To choose the best mortgage for you, you need to consider your goals and needs. There are several types of mortgages and interest rate options.
Types of mortgages
- Open or closed mortgage loan – The open mortgage loan allows you to repay your debt, in part or in full, at any time and without penalty. But expect to pay a higher interest rate for this flexibility. The closed mortgage has a fixed term and fixed terms. You’ll be able to make prepayments each year without penalty (depending on the agreement), and you’ll get a more favorable interest rate for agreeing to keep your mortgage for the expected term.
- Conventional or collateral mortgage – The conventional mortgage is registered at the actual amount of the mortgage.
For example, if you need a mortgage of $250,000 to buy a house, the lender will record $250,000 in the mortgage.
The collateral mortgage can be registered for a higher amount than the actual mortgage loan.
For example, if you need a mortgage of $250,000 to buy a house, the lender may register the mortgage at $300,000.
So, if you later want to borrow additional sums (loans, lines of credit, or other) from your lender, you can do so at any time, avoiding paying fees to refinance your current mortgage. Also, legal fees, if any, will be lower.
- Reverse Mortgage – For seniors who are already homeowners, a reverse mortgage provides access to up to 55% of the value of the home without having to sell it. You are not required to make any payments on this type of mortgage. However, accrued interest and principal are repayable to the lender when you sell your home or no longer use it as your principal residence. The Financial Consumer Agency of Canada has more information about reverse mortgages.
Interest Rate Considerations
- Interest represents the cost of borrowing, which is the compensation to the lender for advancing the funds. This is an annual rate. Interest is usually paid to the lender in periodic installments, along with the principal (loan amount).
- Fixed-rate or variable rate – A fixed-rate mortgage is a loan whose rate is fixed for the term of the mortgage and does not vary with market fluctuations. With a variable rate mortgage, the interest rate varies based on an external factor, usually the Bank of Canada’s overnight rate.
Mortgage loan insurance
The law requires that mortgages with a down payment of less than 20%, called high-ratio mortgages, be insured against default. Thus, borrowers will receive a reasonable interest rate, even when the down payment is small. Also, mortgage loan insurance allows the stabilization of the housing market: during periods of recession, when it is difficult to constitute a down payment, it contributes to the availability of mortgage financing.
If your mortgage payments are overdue and you can no longer make them, mortgage loan insurance will reimburse the lender. The mortgage default insurance premium can be added to your loan amount or paid in full when you purchase the home.
Currently, mortgage default insurance can only be purchased when the purchase value of the property is less than $1 million. When the purchase price is $500,000 or less, the minimum down payment must be equal to 5%. When the purchase price is greater than $500,000, the minimum down payment must be equal to 5% of the first $500,000 and 10% of the remainder.
- Home Buyers’ Plan (HBP) – This plan allows each first-time homebuyer to withdraw from their Registered Retirement Savings Plan (RRSP), tax-free, up to $35 $000 to buy a home in Canada. You will need to start returning these funds to your RRSP in the second year after buying the home and you have up to 15 years to return the full amount. Before withdrawing funds from your RRSP to buy a home, carefully consider the pros and cons of doing so. HBP Eligibility:
- You are a first-time homebuyer. You will be considered as such if, during the previous four years, you have not lived in a dwelling owned by you or your current spouse.
- You must intend to occupy the home as your principal residence within one year of purchase or construction.
- You must obtain a written agreement for the purchase or construction of an eligible home.
- Your RAP balance must be zero on January 1 of the year you plan to withdraw from this program.
First-Time Home Buyer’s Incentive (FPI) – This incentive allows first-time homebuyers seeking an insured mortgage to apply for a 5% or 10% participating mortgage with the Canadian Corporation. of Mortgages and Housing (CMHC). The shared equity mortgage allows the borrower to reduce monthly payments and share with the government the rise and fall in the value of the property. You can repay the incentive at any time without incurring a prepayment fee. You will have to repay the incentive after 25 years or when you sell the property if the sale is made before then. IAPP Eligibility:
- Your total eligible annual income must not exceed $120,000 ($150,000 if the home purchased is in the Census Metropolitan Area (CMA) of Toronto, Vancouver, or Victoria).
- Your total loan must not exceed four (4) times your qualifying income (4.5 times if the home purchased is in the CMAs of Toronto, Vancouver, or Victoria).
- You or your spouse are a first-time home buyers.
- You meet the minimum down payment requirements, either with traditional funds (eg, savings, RRSP withdrawal/liquidation) or a non-refundable gift from a close relative.
For all mortgages, insured or not (down payment of 20% or more), the borrower will have to prove their ability to pay according to the greater of 5.25% and the rate of their contractual mortgage loan plus 2%.
The purpose of these eligibility tests is to verify that the borrower will be able to continue to make their mortgage payments if interest rates rise.
A mortgage contract has a fixed term. When the contract matures, you will have the opportunity to renew your mortgage (or pay the mortgage in full). If you purchased your mortgage from a federally regulated financial institution (such as a bank), the institution is required to send you a renewal notice at least 21 days before the contract expires. So you can shop around for the mortgage loan that best suits your needs.
Termination of contract and prepayment charges
If you have a closed mortgage and you decide to terminate your contract before it expires, expect to have to pay a prepayment charge to compensate the lender for the costs they will incur in reinvesting the funds.
When you sign a mortgage contract, you agree to repay the lender a certain amount during the term of the contract, at a specific interest rate.
If you have a closed mortgage and decide to terminate your contract before it matures, expect to pay a prepayment charge to compensate the lender for the costs they will incur in reinvesting the funds.
Here are some of the reasons why you would want to terminate the contract:
- You sell your house.
- You decide to renegotiate your mortgage to take advantage of lower interest rates.
- You can pay off your mortgage in full earlier before the contract matures.
Information on prepayment charges can be found in your mortgage agreement. Generally, these fees are equivalent to the higher of the following amounts:
- Three months interest on the balance owing
- Interest rate
- differential The interest rate differential takes into account a) the balance of your mortgage loan and b) the difference between the interest rate you pay on your mortgage and the interest rate at which the financial institution can lend the prepayment amount for the remainder of the term.
The banks’ commitment to providing quality information about mortgages ensures that bank customers also have access to information and explanations about prepayment charges. Your mortgage agreement contains an explanation of how prepayment charges are calculated and a formula for obtaining an estimate of these charges. However, contact your lender for a more exact figure. Please note that any figure given by your lender is only accurate at the time. The variables used in the calculation would not be the same the next day or a week later. For example, interest rates may change or the term to maturity of the contract will be different.
Amortization refers to the number of years required to pay off the mortgage in full. For example, if your loan amortization period is 25 years, it will take you 25 years to pay off your mortgage. The longer the amortization period, the more interest you will pay. Keep in mind the following points:
- The higher the down payment, the lower the amount borrowed and the less interest you will pay.
- The frequency of payments is important. By opting for weekly or bi-weekly payments instead of monthly payments, you will pay less in interest.
- The higher the amount of the payments, the shorter the amortization period and the less interest you will pay.
- Some mortgage contracts provide prepayment privileges to repay, free of charge, a lump sum on the principal.
- Choose the shortest possible amortization period and try to reduce it with each mortgage renewal.