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Mortgage Basics

Use these two simple rules to discover what you can afford to pay for a home. Understanding these rules can also help you when it’s time to get approved for a mortgage.

The following terms and options will help you in making the correct and most informed decision when purchasing a property.

Amortization period: The length of time you agree to take to pay off your mortgage (usually 25 years).

Payment schedule: How often you make your mortgage payments. It can be weekly, every two weeks (biweekly), once a month, or accelerated weekly or biweekly. Talk to your lender to see all possible options.

Mortgage term: The length of time that the options and interest rate you choose are in effect. It can be anywhere from 6 months to 10 years. When the term is up, you can renegotiate your mortgage and choose the same or different options.

Down payment: The amount of money that you put toward the purchase of your future home. In general, to purchase a property, the minimum down payment is 5% for a property value of $500,000 or less, and 10% for any amount above $500,000. 

You will also need to prove the amount and sources of your down payment. Some common sources include personal savings, an RRSP withdrawal, a non-repayable gift from an immediate family member, proceeds from the sale of other property, and funds borrowed against proven assets. Check with your lender for qualifying criteria.

Insured mortgages: A loan that is over 80% of the lending value of a home. This means the down payment is less than 20% and will require mortgage loan insurance.

Pre-payment options: The ability to make extra payments, increase your payments or pay off your mortgage early without incurring a penalty.

Portability: An option that lets you transfer or switch your mortgage to another home with little or no penalty when you sell your existing home. Mortgage loan insurance can also be transferred to the new home.

Types of interest rates:

Fixed-rate: The rate doesn’t change for the term of the mortgage.
Variable-rate: The interest rate fluctuates with market rates.
Protected (or capped) variable rate: The rate fluctuates but will not rise over a preset maximum rate.

Open and closed mortgages:

Open mortgage: Let’s you pay off your mortgage in full or in part at any time without any penalties.
Closed mortgage: Offers limited (or no) options to pay off your mortgage early in full or in part, but it usually has a lower interest rate.

Conventional and high-ratio mortgages:

Conventional mortgage: A loan that is equal to or less than 80% of the lending value of a home. This requires a down payment of at least 20%.
High-ratio mortgage: A loan that is over 80% of the lending value of a home. This means the down payment is less than 20% and will likely require mortgage loan insurance.
 

Contact your Mortgage Agent or Broker for more information on the home-buying process and what else you need to consider when purchasing a property!