For the uninitiated, the lexicon of the mortgage world can be confusing, stressful and intimidating. Here’s a primer to demystify the language of brokers and bankers and choose a mortgage that fits your financial picture for now and the future.
According to the Canada Mortgage and Housing Corporation (CMHC) a conventional mortgage is a loan up to a maximum of 80 per cent of the value of the property.
But if you don’t have 20 per cent of the purchase price to cover the down payment, it’s called a high-ratio mortgage. It’s a loan that is higher than 80 per cent of the property up to a maximum of 95 per cent. In this case, you must buy insurance to guard against payment default.
Now, let’s talk interest rates. Fixed, variable or adjustable?
A fixed interest rate is locked-in for the entire term of the mortgage. For variable rates the interest rate fluctuates, based on market conditions, affecting the length of the loan term, but the regular payments remain the same.
For adjustable rate mortgages, both the interest rate and the mortgage payments vary, based on market conditions.
Open or closed mortgage?
With a closed mortgage, you pay the same amount each month for the entire term of the mortgage. Some flexibility, although limited, to repay the principal through lump sum payments is allowed.
An open mortgage allows you to make a lump sum payment at any time. This type of mortgage can be paid off prior to maturity without penalty but it generally carries a higher interest rate than a closed one.
Term, amortization and payment schedules also come into play in the mortgage world. The ‘term’ is the length of time (usually from six months to 10 years) that the interest rate is in effect. Amortization is the period of time (such as 25 or 30 years) over which your entire mortgage will be repaid. Lastly, the payment schedule sets out how frequently you will make payments on your mortgage: monthly, biweekly or weekly.
With all this newly gained knowledge, go out and find that dream home.