Obtaining a mortgage is a big moment in the average homebuyer’s life, with many complex aspects to consider that we don’t encounter in day-to-day life. There’s the down payment, amortization period, payment frequency, and whether to go with a traditional bank or a mortgage broker.
Some of the options mentioned above are consistent from lender to lender, and others are different depending on which lender you choose. To help you determine which mortgage is right for you, let’s take a look at getting a mortgage with RBC Royal Bank.
The down payment
The required size of your home’s down payment is one of the aspects of the home-buying process that doesn’t vary from lender to lender. The federal government dictates the minimum size of your home down payment. Here are the rules:
- If the purchase price is less than $500,000, the minimum down payment is 5%.
- If the purchase price is between $500,000 and $999,999, the minimum down payment is 5% on the first $500,000 and 10% on the remaining amount.
- If the purchase price is more than $1 million, the minimum down payment is 20%.
These minimum down payment requirements apply to an RBC Royal Bank mortgage. A larger down payment usually results in a more affordable monthly mortgage payment, being able to afford a more expensive home, and lower mortgage default insurance premiums (if applicable). You can use a mortgage payment calculator to determine how your home down payment will affect your mortgage payment.
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If your down payment is less than 20% of the purchase price, your mortgage is considered a high-ratio mortgage and you’ll need to purchase mortgage default insurance to protect the lender in the event you default. Mortgage default insurance is commonly called CMHC insurance because the Canada Mortgage and Housing Corporation (CMHC) is the largest provider of mortgage default insurance.
Your CMHC insurance premium is based on the amount of your down payment. For a down payment between 5% and 9.99% of the home’s purchase price, you’ll pay insurance premiums equaling 4% of the home’s purchase price. For a down payment between 10% and 14.99%, you’ll pay insurance premiums equaling 3.1% of the home’s purchase price. For a down payment between 15% and 19.99%, you’ll pay insurance premiums equaling 2.8% of the home’s purchase price. If you can make a down payment of 20% or more, you don’t have to purchase mortgage default insurance.
Your mortgage’s amortization period is the total amount of time it takes to pay off your mortgage. If you have a down payment of less than 20%, the maximum amortization you can choose is 25 years. For mortgages with down payments of more than 20%, you can choose an amortization period of 30 years, but the majority of mortgage-holding Canadians have an amortization period of up to 25 years.
Opting for a 20% mortgage down payment with a longer mortgage amortization will make your monthly payments lower and more affordable, but it will also increase the total amount of interest you pay over time.
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Your mortgage term is the predetermined length of time that you have negotiated a specific rate with a specific lender. Different lenders will offer different term options, so it’s important that you choose a lender that offers a term that will work for your financial situation.
The longer the term, the higher your mortgage rate tends to be. For example, RBC Royal Bank’s special rate on a fixed-rate mortgage is 2.34% for a three-year term and 2.64% for a five-year term (as of May 24, 2017). The higher mortgage rate helps mitigate the uncertainty RBC Royal Bank endures by locking in your mortgage rate for a longer period. Once your mortgage term expires, you’re free to renew your mortgage with your current lender or move to another lender.
When you obtain a mortgage, you’ll need to choose a payment frequency. Your payment frequency determines how frequently you make payments on your mortgage. At RBC, you can choose to make payments on a monthly, biweekly, accelerated biweekly, weekly, or accelerated weekly basis. The accelerated options calculate your payment amount a little differently and result in slightly higher payments, which allows you to become mortgage-free a little sooner and save thousands of dollars in interest.
Prepayment privileges are one area of the mortgage process where each lender differentiates themselves from the pack. Prepayment privileges are how much extra you can pay on your mortgage without incurring penalties. With an RBC Royal Bank mortgage, you can double up your monthly mortgage payments, increase your payments, or make prepayments (up to 10% of the original amount once every 12 months with a closed mortgage).
As you may have noticed, most of the elements of your mortgage will not change from lender to lender. Specific requirements for your down payment size and CMHC insurance premiums are set out by the federal government and are identical no matter which lender you choose. The biggest difference between lenders is the mortgage rate you’ll obtain.
With RBC Royal Bank, the special rate for a five-year fixed mortgage is 2.64% as of May 24, 2017. If you use a mortgage broker to shop for the best mortgage rates, you may be able to get a much lower mortgage rate. A lower mortgage rate will allow you to afford a more expensive home and reduce your regular mortgage payments. Best of all, a lower rate can save you thousands—if not tens of thousands—of dollars in interest charges over the mortgage term.