Choosing Mortgage That is RIGHT for you

What is a Mortgage?

When you purchase a home, you might only pay a portion of the purchase price and need assistance from a lender to cover the remaining cost. A mortgage is the loan you obtain from a lender to pay for the remaining cost of your home, and it represents a legal contract between you and the lender. This contract specifies the terms of the loan, with your property, such as a house or condo, serving as collateral for the loan.

With a mortgage, the lender has a legal right to claim your property if you fail to adhere to the mortgage terms, make timely payments, and manage your home with no outstanding taxes or debts.

When you contract a mortgage, you’ll need to choose a mortgage type and interest rate that suits your situation. There are three main types of mortgages:

1. Fixed Interest Rate

   • A fixed interest rate remains the same throughout the term of the loan. It is usually higher than a variable rate but can sometimes be lower during high interest rate periods. With a fixed interest rate, your payments remain constant throughout the term.

2. Variable Interest Rate

   • A variable interest rate can fluctuate over time. With a variable rate mortgage, your payments can remain the same by adjusting the interest and principal portions of your payment. Some lenders offer a fixed payment option with a variable rate. You can also choose an adjustable payment method, where your payment amount changes with fluctuations in the interest rate.

3. Hybrid or Combination Interest Rate

   • A hybrid mortgage combines both fixed and variable rates. Part of the mortgage may have a fixed interest rate, while another part has a variable rate. The fixed portion provides partial protection against rising rates, while the variable portion offers benefits if rates fall. Note that hybrid mortgages may be harder to transfer to another lender.

Impact of Mortgage Rate Choice

Lenders may impose penalties for early repayment of the mortgage. Typically, you might need to pay a penalty equivalent to three months’ interest if you pay off the mortgage early. This penalty can apply if you sell your home or refinance your mortgage.

Prepayment Privilege

Many banks and mortgages include a prepayment privilege clause, allowing you to pay down 10% to 20% of your mortgage principal per year without penalty. If you expect to make early payments, check if your mortgage includes this privilege to minimize penalties.

Mortgage Flexibility

If you do not plan to own the home until the mortgage is fully paid off, you may need flexibility in your mortgage. Here are two types of mortgages offering different flexibility options:

• Open Mortgages

  • Typically, the interest rate is higher than that of a closed mortgage for a similar term. Open mortgages offer more flexibility if you plan to pay off your mortgage early or if you anticipate having additional funds to pay down the mortgage. This type is suitable if you plan to pay off the mortgage soon, sell the home in the near future, or occasionally have extra funds for repayment.

• Closed Mortgages

  • Generally, the interest rate is lower than that of an open mortgage for a similar term. Closed mortgages often have restrictions on additional payments, known as prepayment privileges, which vary by lender. This type is suitable if you plan to keep your home for the remaining term and if the prepayment privileges align with your repayment expectations.

By understanding these mortgage options and their implications, you can better manage your home financing and make informed decisions.