Mortgage lending is a highly competitive field. Information on mortgage rates, which can change daily, is available in local newspapers, through mortgage brokers, from individual lenders and of course through conventional financial institutions. When you are shopping for a loan, interest rates tell just part of the story. You will also need to be aware of the various fees lenders charge. Many mortgages today are almost custom-tailored to individual needs with a variety of options available.
Lynne & Vicky can recommend lenders/mortgage brokers to get pre-approved with before beginning any serious house hunting so you will know exactly what you can afford.
Types of Mortgages:
There are two basic types of mortgage loans which most mortgages fall under:
The Conventional Mortgage Loan: is typically a loan in which the borrower requires 80% or less of the purchase price or appraised value of the property. This means that the purchaser would need a 20% down payment through their own funding.
The High-Ratio Mortgage Loan: allows borrowers to borrow more than 80% of the purchase price or appraised value of the property contingent on the borrower paying a mortgage default insurance premium in order to protect the lender.
Open vs. Closed Mortgages:
Borrowers should consider whether or not to choose an open or closed mortgage.
Open Mortgages: are those that allow buyers to prepay a portion of their mortgage or the entire amount of principal at any time with no penalty. These types of mortgages generally have shorter terms (usually ranging from six months to a year). Homeowners who are planning to sell in the near future or those who require flexibility in their payment amounts can benefit from an open mortgage.
Closed Mortgages: have strict conditions on prepayment of principal above the agreed upon amounts. Prepayment above what the contract specifies is prohibited and results in penalty. It should be noted, however, that the Federal Interest Act does allow borrowers to prepay all outstanding debt with an additional three months interest in lieu of notice at any time after five years from the initiation of the mortgage.
Variable and Fixed Interest Rate Mortgages:
Fixed Interest Rate Mortgages: provide consumers with a sense of security in knowing that their interest rate is ‘fixed’. The rate is established at the time of initiation and is set for the term of the mortgage. This allows consumers to budget accurately for their regular mortgage payments including interest. In addition, it allows consumers to know exactly what portion of principal will be paid off at the end of the term. Today many of these mortgages also offer flexibility to pay down your principle early with increased payments and lump sum payments.
Variable Interest Rate Mortgages: are sometimes attractive to consumers as interest rates are typically lower than fixed rates. The interest rate charged on a variable interest rate mortgage fluctuates as the market rate varies – the rate is usually similar to that of the Bank of Canada’s prime rate. Consumers most often make fixed monthly payments but the amount of payment that goes to principal and the amount that goes to interest will fluctuate depending on the variable rate. Thus, consumers are not able to concisely predict the amount of outstanding principal to be paid upon the end of the term (although the lender will provide an estimated prediction).