Below is a broad overview of the various types of mortgages. A mortgage broker or bank would be able to suggest the style and terms that would work best for you. Please let me know if you’d like a referral to a reputable broker.
WHAT IS A MORTGAGE?
A mortgage is a loan, generally used to buy a property. How much you pay depends on how much you borrow (the principal), the loan’s interest rate, and how long you take to pay it back (the amortization period).
Do not be afraid to negotiate interest rates and mortgage terms with different lenders. They are offering you a product and talking to more than one lender helps you make an informed decision.
As with anything, rate is not the only factor to keep in mind – especially in Toronto’s market. A good mortgage broker is key for us to win an offer situation and for ensuring your deal closes.
WHAT TYPE OF MORTGAGE IS BEST FOR YOU?
- Fixed rate mortgages: Your interest rate is locked in for a specified period called a term. Your payments stay the same for the mortgage’s term so you will not pay more if interest rates increase over time.
- Variable rate mortgages: Rate of interest you pay may change if rates go up or down.
- Conventional mortgages: Require a down payment of more than 20% of the property’s value. You are not required to get mortgage default insurance with a conventional mortgage.
- Closed mortgages: The mortgage cannot be paid off early without paying a prepayment charge.
- Open mortgages: A mortgage that can be paid off at any time during the term, without having to pay a charge. The interest rate for an open mortgage may be higher than for a closed mortgage with the same term.
WHAT MORTGAGE FEATURES ARE BEST FOR YOU?
- Portable mortgages: If you sell your existing home, you can transfer your mortgage to your new home while keeping your existing interest rate.
- Prepayment privileges: You can make lump sum prepayments or increase your monthly payments without having to pay a charge. This can help you pay off your mortgage quicker and save on interest charges.
HOW MUCH DO YOU NEED FOR YOUR DOWN PAYMENT?
A down payment is the portion of the property’s price not financed by the mortgage. You will need a down payment of at least 5% of the purchase price of the home. For example, to buy a home for $200,000, you will need at least $10,000 as your down payment. If your down payment is less than 20%, you will need mortgage default insurance. For purchase prices over $500K, your minimum down payment must be 5% of the first $500K (i.e. $25K) and 10% of the rest of the value up to $999K. For example, for a $750K purchase price, the minimum down payment would be $50K (5% of $500K and 10% of $250K). Properties purchased for over $1M require a 20% down payment for financing through traditional lenders.
ARE YOU PLANNING TO PURCHASE A PROPERTY WITH LESS THAN A 20% DOWN PAYMENT?
When you buy a home with less than a 20% down payment, the mortgage needs to be insured. This type of insurance protects the mortgage lender in case you are not able to make your mortgage payments. It does not protect you.
This insurance will generally add between 0.5% to 3% to the cost of the mortgage depending on the total amount borrowed. Your mortgage broker will be able to give a more accurate idea of the cost.Source: Homebuyers’ Road Map by the Canadian Real Estate Association.
There are three steps in the financial world of buying a home: pre-qualification, pre-approval and final approval (as they relate to mortgages).
- Pre-Qualification: is meeting with a mortgage broker, permitting a credit check to be performed and sharing your overall financial picture. Once all this information has been submitted, the mortgage broker will provide you with a purchase range. They should also give you an idea of what the monthly payments will be like.
- Pre-Approval: this happens when all your paperwork (T-4’s, Pay Stubs etc.) has been given to the mortgage broker. This confirms the bank’s willingness to provide a mortgage.
- Final Approval: once we have found a property that we would like to offer on, we need to get the bank’s approval. The mortgage broker will submit our offer to the bank and they will confirm the amount of mortgage they would like to provide you. In today’s heated market, we will often ask for this in advance of putting in an offer. In other instances, this is done after we have an accepted offer.