Shopping for a mortgage can be nerve-wracking and navigating the ins and outs of actually securing a mortgage is just the beginning. Once you qualify you have to figure out what kind of mortgage you want, and that can be downright confusing.
What is the mortgage term? What about mortgage rates? Is it better to go for a variable mortgage or one with a fixed term? What about payment options and other terms and conditions?
Most home buyers think the best mortgage rate is the one attached to the lowest rate. This isn’t always the case. The best mortgage is the one that suits all of your financial and lifestyle needs.
When you qualify for a mortgage you need to determine what the term and amortization period are going to be. The amortization period is the amount of time it takes you to pay off the mortgage. The most popular amortization period in Canada is 25 years.
The mortgage term though is entirely different. It represents the amount of time you are locked into the current terms and conditions (mortgage rate, repayment options, etc.) with the current lender. The average mortgage term in Canada is five years; though it can be shorter or much longer.
A shorter mortgage term means you don’t have to wait as long to renegotiate your mortgage without paying any fees. The benefits of a longer-term mortgage, however, is that you are locked in at an interest rate you like for a longer period of time.
Once the mortgage term ends though, you can either sign back up with the original lender or you can shop around for a mortgage with better rates, terms, and conditions.
Remember, you’re the client and because of the competitive mortgage marketplace, lenders should be making every effort to keep or gain your business.
When it comes to looking for a mortgage, most home buyers zero in on the mortgage rate, which isn’t a surprise—that’s the interest rate you pay out during the life of the mortgage. A half point on interest can translate into either paying out, or saving, tens of thousands of dollars during the amortization period.
What can affect mortgage rates? There are some factors you can control, others, you can’t.
For the most part, your financial health is in your control. There are a lot of rate-influencing factors that are out of your control, though. This includes the strength of the housing market, which impacts supply and demand. In a hot housing market, mortgage rates will be higher than they are during a correction in the real estate market.
Other factors impacting mortgage rates include the strength of the economy, inflation, the Bank of Canada’s key lending rate (which impacts interest rates for consumer loans and mortgages), and the bond market.
Variable vs. Fixed
It could be tough to decide whether or not you want a variable rate mortgage or fixed mortgage. If interest rates are going up, you may want to lock into a fixed-rate mortgage. This provides the certainty of know exactly how much of the principle you’re paying down every month and how much goes to interest.
On the other hand, if you think rates are going down, you could opt for a variable rate mortgage. With a variable mortgage, the interest rate fluctuates with the lenders prime rate. In a soft economic environment, this might be a good way to go, since there is less of a chance of rates going up. But the banks can change their rates whenever they like, which adds a great amount of uncertainty.
What is the prime rate? The prime rate, which is also known as the prime lending rate, is the annual interest rate Canada’s big banks and other traditional financial institutions use to set interest rates for variable mortgages and loans.
The prime rate is influenced mainly by the key lending rate set by the Bank of Canada. Also known as the overnight lending rate, it is what major financial institutions charge when borrowing or lending (for one day) amongst themselves.
When the Bank of Canada raises that rate, banks pass on that increase to you in the form of higher or lower prime rates.
Terms and Condition
There’s more to a mortgage than just interest rates. Some key factors mortgage shoppers should consider are:
- The penalty for breaking a mortgage
- Prepayment options
- Porting rules
- Refinance options
- Does the mortgage come with a home equity line of credit?
- What is the rate hold period?
Having options for prepayment in your mortgage can save you a lot of money. Mortgage prepayments allow you to increase your mortgage payments or pay off the mortgage, without incurring a penalty.
On a monthly prepayment basis, the increase is a percentage of the original monthly payment. A lump sum provision allows you to put any money you have towards the mortgage principle without penalty.
Making additional payments on a mortgage will reduce the amortization period and how much you pay in interest. Some mortgages also allow you to skip a payment.
You may not think prepayment options are all that important, but you never know what kind of financial situation you’ll be in in three, five, or 10 years. That’s why it’s important to keep prepayment options in mind when determining what kind of mortgage term to get.
Porting and Assuming Your Mortgage
Are you thinking of selling your home? If so, you might want to look at portable and assumable mortgages. A portable option allows you to transfer your current mortgage balance, interest rates, terms and conditions.
An assumable mortgage allows you to take over someone else’s mortgage and their property. The terms of the original mortgage have to stay the same.
Canadalend.com, Helping You Get the Best Mortgage
There is no one-size-fits-all approach when it comes to mortgages. Everyone has different needs. The licensed mortgage professionals at Canadalend.com will ensure you choose the best mortgage with the best rates and terms to suit your needs.
How can we help you secure a mortgage with better rates and terms than Canada’s major banks? Because the mortgage experts at Canadalend.com are independent they have access to hundreds of different lenders. Big banks will only offer you their own financial products, even if they aren’t right for you.
Some of the lenders we deal with specialize in providing mortgages for those who are self-employed, have unreliable income, are new to Canada, have no credit, or have failed the mortgage stress test.