We live in a society that caters to providing us with many options. For examples cell phone companies have a myriad of phone & plan combinations, new vehicles come with endless upgrade options, even the local supermarket offers numerous varieties of items on things which should be simple and straight forward, like toilet paper. One thing is abundantly clear; it’s no longer a one size fits all world.
The same is true when it comes to financing real estate. In fact whether you are looking to finance your 1st house or your 8th it is important to know and understand all your options. What could be worse that obtaining a mortgage and only later finding out you chose the wrong type simply because you weren’t made aware of the other options? That could be a mistake costing you thousands of dollars. Understanding the types of home financing available is the first step towards finding the one that fits your lifestyle, budget and long-term needs. So which one is right for you?
- Short-term or long-term? Mortgages are repaid in a series of terms and at the end of each term, you can pay off your mortgage, accept a renewal offer from the lender with new terms, or if you can qualify again transfer the mortgage to another lender. A short-term mortgage is appropriate for customers who believe rates will drop and are willing to accept more risk of rate fluctuations at renewal. A long-term mortgage (usually three years or more) are chosen by people who want to lock in their rate and not have to worry about fluctuation in the market for several years.
- Fixed or variable interest rate? When you take out a fixed rate mortgage, your interest rate will never change throughout the entire term of your mortgage. As a result, you’ll always know exactly how much your payments will be and how much of your mortgage will be paid off at the end of your term. With a variable rate mortgage, your interest rate may vary from month to month. When rates change, your payment amount remains the same however the amount that is applied toward interest and principal will change. If interest rates drop, more of your mortgage payment is applied to the principal balance owing. This can help you pay off your mortgage faster.
- Open or closed? Open mortgages can generally be paid off at any time without compensation and are suited to homeowners who are planning to sell in the near future or those who want the flexibility to make large, lump-sum payments before the end of the term. Closed mortgages are commitments for a specific term. If you want to pay off the mortgage balance, you will need to wait until the maturity day or pay compensation. In exchange for reduced flexibility, you will generally receive a lower interest rate than with an open term.
- Conventional or high-ratio? The amount of your down payment will determine if you require a conventional mortgage or high-ratio mortgage. A conventional mortgage is a loan for no more than 80% (i.e. minimum 20%down payment) of the appraised value or purchase price of the property, whichever is less. If your down payment is less than 20% you’ll be applying for what is called a “high-ratio mortgage.” A high-ratio mortgage must be insured by a mortgage default insurer such as Canada Mortgage and Housing Corporation (CMHC), Genworth Financial Canada, or Canada Guaranty. The mortgage insurer will charge you a fee for this insurance and that fee will depend on the amount you are borrowing and the percentage of your own down payment. Typical fees range from 0.6% to 4.00% of the principal amount of your mortgage and can be paid up front or added to the principal portion of the mortgage.
As there are a wide variety of home financing options that each provide a unique combination of value and features it is recommended that you talk to a Benchmark mortgage professional that can help you review each of the options so that you can decide which one is best for you.