Mortgages 101

Financing is probably the subject that Buyers and Sellers have the most questions about. A mortgage is the largest financial commitment that most consumers will make so it’s important to understand how they work and how you can pay it off faster to enjoy financial freedom earlier. Below are some helpful definitions and tips. While it is certainly no substitute for a consultation with a mortgage professional, it’s a good start!

In Canada all single family residential mortgages are of two basic types Conventional and Insured or High Ratio.

Conventional:

In which the Buyer can borrow up to 80% of the purchase price or value of the property, whichever is less. You must provide at least 20% of the financing as a down payment.

Insured or High Ratio:

In which the purchaser can borrow up to 95% of the purchase price or value of the property, whichever is less.

Watch this video from Genworth Canada for some more information:

Open/Closed Mortgages

An open mortgage lets you pay off as much of the principal as you want at anytime without penalty. A closed mortgage locks you into a specific payment schedule with a penalty applied if you wish to repay the loan in full before the end of the term. A closed mortgage usually offers a lower interest rate for the same term.

Term

This is the length of time for which the interest rate on your mortgage is fixed. At the end of the term, the outstanding mortgage can either be paid in full or renewed for another term at the prevailing rate.

Fixed/Variable Interest rates

A fixed rate mortgage has the same rate over the length of the term and allows you to budget precisely for whatever term you select. A variable rate changes with the prevailing interest rates and allows you to speculate during a fluctuating market hoping for a lower average rate. The interest rate you pay will usually be slightly lower than a fixed rate but if interest rates rise so does your payment. Variable rate mortgages generally are for the more experienced home Buyer or for those more comfortable with risk.

Prepayment Privileges

An amortization period (the time it takes you to pay off the total mortgage) can range from one to twenty five years. The longer the amortization period, the more interest you end up paying. Prepayment privileges vary with the financial institution. The prepayments are deducted from the principal owing and can substantially reduce the amortization period and the total interest paid.

Weekly/Bi-weekly payments

Accelerated bi-weekly payments are calculated to allow you to make 26 payments per year instead of 12 monthly payments. This results in a huge interest savings and lets you pay off your mortgage sooner.

Portability

If you purchase another property, you can take your mortgage with you to help finance your new home.

Pre-Qualified versus Pre-Approval

Pre-qualified application means having your mortgage lender calculate the amount of a mortgage that you can comfortably afford given your income and other debts. Pre-approval requires you to complete an application. Then your credit rating will be reviewed by the lender.

Benefits of a Pre-Approved Mortgage

A pre-approved mortgage gives you peace of mind when you are shopping for a home. First, it provides a guideline for the price range of home that you should be considering. A lot of time and opportunity can be wasted if you’re looking at homes that are higher or lower priced than you can comfortably afford. Pre-approval also guarantees your interest rate for a specified period of time. This can protect you from fluctuations in the rates during your pre-approval period. A higher interest rate means higher payments or a decrease in the price of home for which you can qualify. Finally, when you’re ready to place an offer on a home a pre-approved mortgage provides you with greater strength in negotiating.

Here is a helpful video about your credit score and how it affects your mortgage application:

Dane Moffatt

Dane Moffatt

CIBC Mobile Mortgage Specialist

Send a Text to Dane

Call: 519.494.6112
Fax: 1.800.945.1315
Email: dane.moffatt@cibc.com

Dane Moffatt is our resident CIBC mortgage specialist. He is a great resources whether you are considering buying your first home or are a seasoned investor. Getting a mortgage preapproval is a critical step when considering a move so make sure you consult a knowledgeable mortgage person.
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