So, you’re looking to buy your first home in Canada. Choosing a mortgage rate can sometimes seem a little overwhelming! With lots of different options and choices available to you, and every lender attractively packaging each offer up, it’s important to know what to look out for, and which mortgage rate is the best choice for your individual circumstances.
1. Fixed Rate VS Variable Rate
This is a key decision, and not one to be taken lightly. If you opt for a fixed rate mortgage, then this will keep the interest rate throughout the entire term of the mortgage exactly the same. A variable rate is precisely as its name suggests, it will change over the term of your mortgage in line with interest rates that are set by the Bank of Canada.
Which is best?
If it is likely that interest rates in Canada will rise, or, perhaps you are not comfortable with any penalties should you decide to sell your home before your mortgage term is through, then a fixed rate mortgage is the best option for you to consider. A variable rate, on the other hand, is better suited to you if the interest rate is fairly low and looks set to stay that way, sometimes floating along with the rates of interest set by the Bank can deliver a reduced amount of interest to pay. It can also suit you if you are looking for the flexibility to sell your home before the end of the mortgage term.
2. Amortization Period
The amortization period can be a real point of confusion for first-time buyers. Simply put, it is the total length of time it will take you to pay off your mortgage. The most typical mortgage in Canada will have a term of five years, and a 15 to 25-year long amortization period. If you opt for a government-insured mortgage, then the longest period you can have is 25 years.
3. Mortgage Term
A mortgage term is the amount of time that you are committed to the lender, the mortgage rate and any terms and conditions you have agreed to with that lender. Choosing the right term is vital as this will impact your mortgage rate. Taking a mortgage out with a shorter term will generally give you a lower mortgage rate. When your term is up, everything gets reset. You are then required renew your mortgage and agree to a new term. Most terms will last between 1 and 5 years. Your interest rate will be higher over a longer mortgage term.
4. Open or Closed
If you are looking into your mortgage options, deciding on whether to get an open or closed mortgage is a key choice. If you choose to go with an open mortgage, you might pay a higher rate of interest. However, you have the option to pay your mortgage in full, at any time. Closed mortgages, on the other hand, are a little more restrictive. If you want to pay your mortgage back in full, there are often penalties, and there are limits on the amount you are able to pay back over a specified period of time.
If it is likely that you will get the extra money together to allow you to pay off your mortgage, then the flexibility of an open mortgage would probably be a better option.
5. Prepayment Options
It is important that you ask your lender about pre-payment options as they could help you to pay off your mortgage a lot quicker. You may consider increasing the amount of your payments, either monthly, or annually in a lump sum. Or, something which is known as “double up”, this is simply paying more on your pre-set payment dates. Although there are limitations on how much you can raise your regular payments by, or pay off a lump sum; generally, this is between 10 and 20 percent. This will all depend on your lender and the mortgage you are opting for. A good example of this is where a lender will offer a prepayment option called “10+10”. This will allow you to increase your payments by 10% and also to make a payment of up to 105 of your principal each year.
There are a few key decisions you will need to decide upon when you are deciding which mortgage is the best for your individual circumstances. Knowing which choices that you need to make in advance will not only save you time, it will allow you to get straight to the bottom of what your potential borrower is offering you, and if it’s suited to your requirements.