One of the most common requirements when purchasing a property is obtaining financing, or a mortgage. A mortgage is a debt secured against a property. Without the benefit of a mortgage we would be required to pay for a property in cash. A mortgage must be repaid over the duration of the loan and interest is charged. (Many people have heard that the first mortgage payment is mostly interest. The great news is that on your first mortgage payment over 50% goes towards paying down the debt.)
When purchasing a home you it is important to understand the key features of a mortgage.
When buying a home, you are required to put some money towards the purchase. The minimum down payment is currently 5% in Canada for homes under $500,000. For homes over $500,000 but under $1,000,000 you must put 5% down for the first $500,000 and 10% of the amount exceeding $500,000. i.e. – on a $750,000 purchase you would be required to put a minimum of $50,000 down (5% of $500,000 + 10% of $250,000). If the property costs more than $1,000,000 or is a rental property, the minimum down payment would be 20%.
The amortization period is the time frame which you pay off your mortgage. A longer amortization means a lower payment but greater interest cost. Whereas a shorter amortization makes for higher payments but a lower interest cost.
At Kirkwood & Brennan we work to determine the optimal amortization for each client based on their personal goals and circumstances.
The term is the period in which you are committed to a lender and rate. At the end of the term you must negotiate a new rate. Mortgage terms typically range between 2 and 10 years.
We work with our clients to determine the best mortgage term to minimize the chance of mortgage penalties.
Fixed vs. Variable
One of the biggest choices when securing a mortgage is deciding between a fixed and variable product.
Advantages – The interest rate does not change. When interest rates are low this can mean very low interest costs and payments that do not change.
Disadvantages – The penalties on fixed rate mortgages are typically 2 to 5 times larger than the penalties on variable rate mortgages. (This is why selecting the right term and product is so important!)
Advantages – The interest rate is often lower on variable rate products when compared to fixed rates. Additionally, variable rate products have been cheaper historically when compared to fixed rate mortgages.
If you must break a mortgage early the penalties on variable rate mortgages are significantly smaller than fixed rate products. If you have a job or family situation where you feel there is a very high chance you will break the mortgage early a variable product may be your best choice.
Disadvantages – Your interest rate may increase if rates go up. This may mean your payments increase as well. A 0.25% increase would mean your payments increasing by $13 per month for every $100,000 you owe. It is important to note that some lenders do not increase your payments if interest rates increase.
A tip from Kirkwood & Brennan
You could potentially pay off your mortgage 12 years faster by taking accelerated biweekly payments and taking a variable rate mortgage but making the payments you would have with a fixed rate mortgage.
Payment frequency is how often you make a mortgage payment. You can choose between weekly, biweekly and monthly payments. There are also options to make accelerated payments which can help you pay off your mortgage faster.
Mortgage Default Insurance
When your down payment is less then 20% you are required to pay mortgage default insurance to an insurance provider. There are three mortgage insurance companies in Canada currently, CMHC, Genworth and Canada Guaranty. The Mortgage insurance is to protect the lender and should not be confused with life insurance.
If you are able to put 20% down you can save thousands by avoiding the mortgage insurance premium.
The Mortgage Process
Before the lender provides the money to help you buy your next home lenders have a few questions. This is called the mortgage underwriting process.
Lenders want to make sure you are able to afford your payments and that you are not biting off more than you can chew.
They typically look at the following:
Where We Come In
As mortgage broker’s we are on your team. Our job is to understand your needs, plans and wants in order to understand your mortgage needs. We then look at a number of lenders to find the best products and solutions for you.
During our time in the industry we have learned a number of tips and tricks to help you save money and to pay of your mortgage faster.
If you have any questions or would like a customized mortgage plan let us know!
Keaton and Scott.