Buying a house is the largest investment for most of Canadians.  It can be a stressful event for first home buyers who do not understand workings of a real estate transaction.  There is a lot of money
at stake when you buy or sell a home, and if you make a mistake it may hurt you for many years.

Educate yourself and make your home ownership a rewarding and satisfying experience - the better
is your knowledge the better decisions you can make.  Deciding what mortgage would best fit your needs is a good point to start.

Home Mortgage Loans


Your mortgage will be a combination of different options, depending on your financial situation and
own choice.  You should learn about mortgage types before you approach lenders.

What Is A Mortgage

Mortgage is a loan to buy a house.  Like with any other loan, the borrowed amount (principal) has
to be paid back together with interest, and each mortgage payment consists of repayment of the principal plus interest.

Mortgages have many features which differentiate them from other types of loans.  If you know
them you can make a better decision on how to finance the purchase of own home.

Down Payment vs. Lender's Risk

Conventional Mortgage  -  The lower your down payment the greater risk your lender will have to take.  A large down payment of 20% or more of the purchase price will qualify you for this type of mortgage.  That means you won't have to buy mortgage insurance protecting your lender when you default on payments.

High Ratio Mortgage  -  If you save less than 20%, but not less than 5% of the purchase price you can only get a high ratio mortgage which must be insured.  Mortgage insurance makes home buying possible for those who did not save at least 1/5 of the price, but have enough income to afford higher mortgage payments and cover insurance cost.

Closed vs. Open

Closed Mortgage  can't be paid off without a penalty before the mortgage term expires.  Mortgage term is a period of time (from six months to ten years) for which a mortgage contract is made.  The whole mortgage becomes due at the end of a term, unless it is renewed for another term with a new contract.  Most home owners require more than one term to repay their mortgage.

Closed mortgages have lower interest rates than open mortgages, and many lenders allow extra annual payments of 10% - 20%  of the outstanding balance, without pre-payment charges.

Open Mortgage  is more flexible since it can be paid off faster, without a fine.  Despite a higher rate additional payments can save you thousands of dollars in interest charges.  It is a good choice if you plan to sell your house, or anticipate extra income in the near future.

Fixed vs. Variable

Fixed Rate Mortgage  has a specific, steady interest rate for the entire term.  This mortgage is usually open for a short term and closed for a long term.  Fixed rates are the lowest for a 6 month term, and they grow along with the term length.  If you want a long term protection against rising interest rates you may choose a fixed rate option for up to five years.

Variable Rate Mortgage  is closed, and its interest follows market rates fluctuations throughout the term.  Variable interest rates are usually much lower than fixed rates for a long period of time, such as a five year term.

See an example of how fixed rates grow over time, and how they compare to variable rates at some point in time :
LendersVariable
Rates
Fixed  Rates
6
months
1
year
2
years
3
years
4
years
5
years
Bank  16.57.57.98.18.38.48.5
Bank  26.457.457.57.758.08.38.6
Bank  36.757.57.457.77.98.258.45
If rates drop you will pay off your mortgage faster due to a lower cost.  On the other hand, if interest rise it will take longer to repay a mortgage and your cost will increase.

Variable rate mortgages provide some security and flexibility in a long term.  Mortgages for five year term usually can be switched from closed to open after three years, and if your term is at least three years you can lock into fixed rates at any time without a penalty.

Convertible Mortgage  might be a solution for those who hesitate what to choose.  Borrowers who want to keep their options open for some time can choose this type of a short term (for six months or one year) fixed rate closed mortgage.  They will have a flexibility to lock in their rates for a longer term (three years or longer) when the initial short term expires.

Short Term vs. Long Term

Short Term Mortgage  has a term shorter than three years.

Long Term Mortgage  is for a three to ten year term.  A short term financing may cost less in interest but lacks the security of a long term option.

When deciding what financing to choose carefully analyze your risk tolerance.  If you are confident that interest rates won't be rising and can afford higher borrowing cost in case they do, a short term option may be right for you.  Otherwise, you may rather consider a long term solution and consider an extra cost as the price for buying peace of mind.



Builder's Financing

Some builders offer own financing with lower interest to attract more home buyers. These mortgages usually inflate prices and are not renewable.

When the builder's mortgage term expires you will have to find a new lender, and may end up paying higher interest.

Vendor Take Back  -  You may pay a portion of the price to a builder in monthly installments, and
at favourable interest rates.

The rest of the financing will be covered by the money from your bank and your down payment.

Interest Rate Buy Down  -  Builders may pay your lender a lump sum of money when you obtain your loan.

Buy down will reduce your interest for a fixed term (usually one to two years) and increase the amount for which you may qualify with a bank.

Other Mortgage Options

Portable Mortgage  can be moved to another house.  This feature usually applies to fixed rate closed mortgages.  You can transfer your rate, balance and term maturity/ending date.

If extra funds are required they can be borrowed at current rates.  When the debt on a new house is smaller you may pay a penalty on the amount of the reduction.

Assumable Mortgage  allows a qualified buyer to take over the seller's mortgage, and a good rate can be a great incentive for buyers if the market is poor.

On the other hand, the seller may be liable when the new owner defaults on payments.  If you can't be released by your lender from such an obligation let the buyer get own loan.

Second Mortgage  (also called an equity loan) is another mortgage taken on the same property.

Equity is the difference between the value of your property and the outstanding debt against it.  In other words, your house equity is the part of your house that you actually own.

These mortgages are often taken by home owners who have already accumulated some equity in their homes, and use it as a collateral to borrow again more funds.

Second Mortgage Loan Rate

When you default on payments your primary mortgage will be repaid first with proceeds from
the sale of your house.

The remainder will be used to pay off the second mortgage. This may not be enough to recover the funds. That's why second mortgages carry higher interest rates.

However, such mortgages are collateralized and they still have lower rates than typical unsecured debts, like personal loans and credit cards.


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