There are many factors to consider when choosing your mortgage type for the first time. Rates, features, options, market trends, and long term goals should all be taken into account when choosing your mortgage. Below we have outlined some of these important considerations.
The amortization period of a mortgage is the total length of time it will take to pay off the overall cost of borrowing. A common amortization period is 25 years. Shortening your amortization period can help to reduce your overall cost of borrowing. Consider the fact that mortgage lenders charge interest on mortgage loans, therefore, the longer it takes to pay off the mortgage, the more interest one pays.
Your mortgage term is the length of your mortgage agreement; usually this length ranges from 6 months up to 10 years. Once your mortgage term has expired the balance of your mortgage can be repaid, refinanced or renewed by your lender at current market interest rates.
High Ratio versus Conventional Mortgages
Mortgage default Insurance is mandatory for all borrowers with a down payment of less than 20%. A High Ratio or Collateral Mortgage is one where the down payment is less than 20% of the purchase price or property valuation. In this case, the mortgage must be insured by a mortgage insurer.
On the other hand, a Conventional Mortgage is one where the down payment is equal to, or greater than, 20% of the purchase price or property valuation. This means you are not required to seek additional mortgage default insurance.
Fixed vs Variable
Fixed rate mortgage
This mortgage type means that your interest rate is set at the beginning of your term and will not change throughout the duration of your mortgage term. This mortgage type offers a predictable and steady payment structure as your interest rate will always remain the same.
Variable rate mortgage
This mortgage type means that your interest rate may fluctuate intermittently because it is based on the market (prime) rate. A variable rate mortgage can offer significant savings at the beginning of your mortgage term. A variable rate mortgage provides you with flexibility to take maximum advantage when interest rates fall. However, should interest rates rise, a greater portion of your repayment amount will go towards the interest payment versus the principal of the overall mortgage.
Determining the Right Term
Which type of mortgage term is right for you? In addition to considering interest rates and the amortization period of your mortgage, you also need to review open versus closed rate mortgage terms.
An open mortgage term is more flexible allowing you to pay any amount towards your mortgage at any time. This means you would be able to pay off your mortgage in full before the end of your term without having to pay prepayment compensation.
Prepayment compensation is an additional fee required should one choose to pay off the balance of the principal mortgage before the agreed mortgage term has expired.
A closed mortgage term is typically more stringent on payment times and requires you to pay prepayment compensation if you want to exit your mortgage term earlier than expected.
Convertible or Flexible Mortgage Options
Some lenders offer flexible, or convertible, mortgage options. For example, a convertible mortgage could offer one a fixed-rate mortgage term with the same security as a closed mortgage. However this mortgage may be converted to a longer, closed mortgage at any time without penalty.
The Finance Guys has the mortgage brokers that will get you into one. A good mortgage broker will be able to help you find the mortgage term that is best suited to your financial needs.