Making the decision on which rate, lender, and in turn, which mortgage is right for you can be overwhelming without the right tools and know-how to understand your options. There’s more to getting a mortgage then simply making a decision on whether you want a variable or fixed rate and then deciding on a term length, so it’s important to understand the various options that may or may not come with your mortgage package as well as the terminology used.
The House Hunting Phase
When you’re first beginning to look for a new home, there are a few important things you need to keep in mind. First off, you’ll want to get a mortgage pre-approval, which is an agreement from a lender to loan you a certain amount of money to buy a home before you have found a property. This way, you know you’re pre-approved up to a certain amount and can begin house hunting within your approved budget. A pre-approval is based on your income and credit score, and, similar to a mortgage, a pre-approval comes with a set term and interest rate. However, this pre-approval is not a final decision, and is only valid for a certain period of time—typically 90 to 120 days.
Instead of a mortgage preapproval, you might come across the option for a rate hold. A rate hold clause allows you to lock in the current, best mortgage rate prior to getting or renewing your mortgage. If you’re a new buyer, your interest rate is guaranteed, however your mortgage application and specific financial situation has not yet been processed (unlike when you apply for a pre-approval) and you could be refused if you don’t meet the criteria. If you already own, and have a 5-year mortgage term with a 90-day rate hold, this means you’ll be able to lock in the current mortgage rate within 90 days of your term expiring.
Selecting a Mortgage
When it comes time to select your mortgage package, there’s more to consider than which lender will offer you the best mortgage rates . There are a number of possible terms and conditions that can come alongside your mortgage, and, depending on your plans for the future you may want to take some of them into consideration when weighing your options.
First, you’ll be setting something called your amortization period. This is the length of time it takes you to pay off your entire mortgage. Under the new mortgage rules in Canada, the maximum amortization you can have on a CMHC insured home (so a home with less than a 20 per cent down payment) is 25 years. However, some lenders will negotiate a longer amortization (30 to 40 years) for a non CMHC-insured home (ie. if your home is worth over $1M or you put more than 20 per cent down).
You’ll also be selecting a mortgage term, which is the length of time your rate and terms and conditions are locked in for. You can select a term as low as six months or as long as 10 years. The most common term in Canada is a 5-year fixed rate, which 66 per cent of Canadians had in 2010 .
If you think you may sell your home before your term is up, ensuring you have an assumable mortgage could be a good idea. This clause allows you to transfer the outstanding mortgage on your home to the new buyer, and you avoid penalties for breaking your mortgage early. However, the buyer will have to qualify for the mortgage and be approved by your lender before proceeding.
A portable mortgage can also be helpful in this situation. This means you’re able to transfer your existing mortgage—including the terms and conditions and interest rate—to your new home. Again, this ensures you won’t be penalized for ending your mortgage early. However, you will still require a credit review and property appraisal when making the purchase. If your new home will be more expensive than your previous one, you may be able to “add-on” to your mortgage.
Once You Own
Mortgage pre-payment options allow you the flexibility to increase your monthly payments or make additional payments towards your mortgage without penalty. The two pre-payment options are lump sum, which means putting additional money directly towards your mortgage principal, and monthly payment increase which allows you to increase your original monthly mortgage payment..
Pre-payment options are a great way to pay off your outstanding mortgage faster without facing hefty penalties. Each time you make a mortgage payment, you’re paying both principal and interest on your mortgage. As your mortgage balance decreases, so does the interest portion of your payment, so pre-paying, or paying more than your monthly mortgage, can be a good idea if your terms allow it and if you can afford it. In 2011, 32% of Canadians took advantage of pre-payment options.
If you’re thinking of borrowing more money in the future, than a collateral mortgage could be a beneficial option. This kind of mortgage assumes you will want to borrow more money eventually, and makes that extra amount available without refinancing or setting up a home equity line of credit. As long as you maintain at least 20 per cent equity in your home, you can borrow up to 80 per cent of its value.
Now that you have a grasp of the terms associated with a mortgage package, let’s take a look at three of the top Canadian banks and some of the terms and conditions on a five-year fixed rate closed mortgage package.
5-Year Fixed Rate Bank Mortgage Packages as of July 31, 2012