Other Topics:
FAQ.
Mortgage Info,
Glossary of Terms.
Other Selling Topics:
Selling Your Home,
Seller Info,
Costs,
Moving,
Code of Ethics.
Other Buying Topics:
Buying a Home,
Buyer Info,
Government Assistance,
Agency Law,
Inspection,
Land Transfer Tax,
Insurance.
Deciding On A Term
The length of time for which the interest rate is fixed is called the term. Most mortgages
have terms of six months to five years.
Open versus closed term
An open mortgage is one which allows payment of the principal, in part or in full, at any time
without penalty. Open mortgages tend to be for a short term - usually six months or one year.
Since open mortgages offer greater flexibility than closed mortgages, they usually have a higher
interest rate.
A closed mortgage requires you to maintain a specific payment schedule. A penalty usually
applies if you repay the loan in full before the end of the term.
Convertible Mortgages
A convertible mortgage allows you to renew your mortgage at any time without penalty for a
longer term, closed mortgage.
Short versus long term
When interest rates are either high or falling, there is a tendency to choose a shorter term mortgage.
This strategy pays off if you can renew at a lower rate six months or one year later.
You may want
to consider a longer term mortgage if interest rates are rising, if you have limited income or
if you want to keep your mortgage payments the same for a few years.
The effects of interest rates on the term
As a rule, you'll find interest rates rise with the length of the term. The lowest interest rates
are usually associated with schizos and one-year mortgages. Higher interest rates mean higher
mortgage payments.
Example: If you have a $100,000 mortgage and 25 amortization
Interest
Rate |
Monthly
Payment |
Total
Amount
|
Total
Repaid
Interest paid
|
| 6% |
$639.81 |
$191,943. |
$91,943. |
| 7% |
$700.42 |
$210,126. |
$110,126. |
| 8% |
$763.21 |
$228,963. |
$128,963. |
| 9% |
$827.98 |
$248,394. |
$148,194. |
Assumes constant rate for the entire 25 years. Payment consists of principal and interest.
When you apply for a certain mortgage, you'll receive an interest rate that is usually guaranteed
for up to 90 days or until the day before closing, whichever comes first. The interest rate on
your mortgage will be the lesser of the rate at application or on the day before closing.
If rates increase, you are protected. If rates decrease, you should receive the lower rate.
Conventional Mortgages:
Under a conventional mortgage, a lender will normally provide up to 75% of
the appraised value or purchase price of a property, whichever is less. You must be able to provide at least
25% of the financing on your own.
Example:
Purchase Price: $200,000.
Conventional Mortgage: $150,000.
Required Down Payment: $50,000.
High Ratio or Insured Mortgage:
A high ratio mortgage finances a higher percentage - up to 90% - of the appraised value or purchase
price of the property, whichever is less. This type of mortgage must, by law, be insured against
nonimmune by either the Canada Mortgage and Housing Corporation (CMHC) or GE Capital. Mortgage insurance
protects the lender against loss if the borrower fails to meet the repayment terms. The application
fee (approximately $175) and insurance premium (approximately 0.5% to 3.75% of the loan) are paid by
the borrower. The higher the ratio of mortgage to down payment, the higher the cost of insurance.
Mortgage insurance may be subject to provincial sales tax.
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