Exploring Your Mortgage Options
Exploring Your Mortgage Options
The Three Elements of a Mortgage
Mortgages have basic parts: The sum, the interest and the term. Understanding how these pieces work together can help you pick the best mortgage for you.
Depending on your down payment you may be getting a High Ratio or a Conventional mortgage. They are different in terms of how you qualify, down payment and how long you can borrow or amortize your mortgage for.
With high ratio mortgage the down payment on the purchase of a home by a borrower is less than 20%. Due to the higher rate of default, high ratio mortgage must be insured against mortgage default by one of the three mortgage default insurers in Canada.
Conventional mortgages (mortgages with 20% or more down payment or equity with a refinance) aren’t insured against default. The borrower usually pays a higher mortgage rate for conventional mortgage due to the higher risk to the lender.
There are two kinds of mortgage rates – fixed and variable – and you can pick the type of rate that matches your goals. Your mortgage may be amortized for up to 30 years but rates are set in terms between one year and 10 years. You can see our current interest rates here.
With a fixed-rate mortgage, your payment will stay the same for the term of the mortgage. This option keeps your month-to-month mortgage payment consistent and predictable. This is a great option for homeowners who want a regular payment to budget around.
A variable-rate mortgage come with a term of three or five years. The rate is based on whats called the Bank of Canada overnight rate and could fluctuate up or down whenever that rate change. Some people like the variable rate mortgage as even though the payment isn’t as predictable as the fixed rate, historically they pay less that the 5-year fixed rate. With a variable rate mortgage if the interest rate rise less of your payment will go to the mortgage and more to the interest. If rates fall, more of your payment goes to the principal and less towards interest so this help to pay off your mortgage faster.
The amortization is how long you must pay off your mortgage. The maximum amortization for a high ratio mortgage is 25 years while the maximum lenders will amortize a conventional mortgage for is 30 years. Your financial strategy could prompt you to take a shorter amortization
|Benefits of a Longer Term||Benefits of a Shorter Term|
|A longer amortization can help keep your monthly payments lower, freeing up cash for home improvement projects or building your savings.||Benefits of a Shorter Term A shorter amortization means you’ll pay off your mortgage sooner, pay less in interest and can build equity in your home faster.|
Use our amortization calculator to see how your monthly payment breaks down and how additional payments can save you money on interest.
The Many Parts of a Monthly Mortgage Payment
Monthly payments are usually composed of three to four components: the principal, the interest, and the taxes (condo fees, if applicable)
- The principal component of your mortgage payment goes toward paying down the balance of your mortgage. Any money paid toward your principal increases the amount of equity you have in the property.
- The interest goes to your lender as payment for borrowing money.
- The taxes can be paid through your mortgage company or by yourself. This is paid to your municipality when they become due.
- If you are mortgaging a condo you will also have a condominium fee to pay.
- Insuring your property is a condition of the mortgage and you will be in default of you mortgage if your property insurance lapses.