Mortgage Matters: Choosing a Mortgage
Your monthly mortgage payment is just one small part of home financing. There are several other elements to consider.
The amortization period is how long it will take to pay off the total loan, which typically ranges from five to twenty-five years for insured mortgages through CMHC. The longer you take to pay off your loan, the lower the payments, but you’ll pay more in accumulated interest.
The term of the mortgage is how long it lasts. It typically ranges from six months to ten years. When the term expires, you can renegotiate certain terms of the loan, transfer your loan to another institution, pay it off, or renew it for another term. The term is essentially the total amortization period broken into smaller chunks.
The interest rate on a mortgage is the premium you pay to the lender for lending you money. Shop around for competitive rates and terms. Check out all the big bank websites as well as www.ratehub.ca, www.ratebot.ca, and www.canadamortgage.com.
A fixed interest rate means that the lender can’t change the rate and your payment is set for the full term; great when rates are low.
A variable rate fluctuates with prime rate, and is typically lower than the current posted fixed rate allowing you to pay more principle. But the rates can fluctuate. This option is great when rates are high but declining.
Next, choose between an open or closed mortgage. Open mortgages costs more because you can, at any time throughout the term, pay any portion of the loan off without penalty and can negotiate almost any term of the mortgage at almost any time.
A closed mortgage means you are committed to the terms and conditions of the mortgage until your term is up.
Many lenders allow offer pre-payment options; lump-sum payments of 10 or 20 percent of the original amount each year, “double-up” payments, increased regular payments or accelerated weekly or bi-weekly payments.
There are two hybrid mortgages. A capped-rate mortgage takes advantage of a variable rate. If the rate increases to a certain level, the mortgage locks in for the remainder of the term (thus capping the rate). You pay a premium for this mortgage structure. A convertible mortgage allows for the existing terms to be converted to new terms (hopefully more favourable) after a certain period of time.
Published by Metro News March 18, 2013.