Yes, mortgage rates have recently shot through the roof while home sales and home prices have fallen off a cliff. But despite rising interest rates, Ontarians are still applying for mortgages and purchasing homes. The key is to shop around.
In fact, depending on your financial health, this might be the best time for you to take advantage of dropping home prices and mortgage demand and consider one of the gorgeous cottages for sale on Lake Rousseau. The beauty of the Township of Muskoka Lakes is breathtaking and the perfect escape from city life.
In the meantime, you can learn about the basics of mortgages in this post to give you a better idea of the type of mortgage that best suits your needs.
The Down Payment
If the money you’ve put away for a downpayment on a home is less than 20% of the purchase price, you’ll be looking at what’s known as a high-ratio mortgage. This doesn’t necessarily mean a higher interest rate; high-ratio mortgages require mortgage insurance which cuts down the risks to lenders, making it easier for them to offer you reasonable interest rates.
The minimum down payment in Canada is 5% for a home up to $500,000; however, some mortgage lenders may require more. When the purchase price is over $500,000, the minimum down payment is 5% on the first $500,000 and 10% for the remainder of the purchase price.
How Long Do You Want Your Mortgage to Last?
This is known as the amortization period. You can reduce the amount of your mortgage payments by choosing a longer amortization period but doing so means paying more money in interest. For high-ratio mortgages, the maximum allowed amortization period in Canada is 25 years.
The conditions of your mortgage contract typically have to be revisited every so often during the life of the loan. The amount of time between these mortgage renewals is known as the mortgage term. They can range from a few months to a few years. Your choices are short-term, long-term and convertible.
Choosing a short-term mortgage gives you the ability to renegotiate your mortgage sooner rather than later, which is ideal if you think you’ll be moving in the near future or if you feel you’ll be able to get a better interest rate when the term is up. The downside to a shorter term is that you may end up having to pay a higher interest rate if interest rates have increased when you’re renewing your mortgage.
A long-term mortgage may be more suitable for you if you prefer to lock in your current interest rate and want to know what your mortgage payments will be to budget your finances. Of course, locking in your interest rate could mean missing out on a better one if rates go down.
A convertible term allows you to extend a short-term mortgage to a longer term at the interest rate provided by lenders for their long-term mortgages.
Homeowners are understandably stressing out as their mortgage payments are suddenly increasing. Interest rates can either be:
- Fixed at a certain rate for the term of your mortgage. This can mean a higher rate than a variable rate but is the right choice if you feel that interest rates will be going up and/or if you prefer keeping your payments the same for the duration of your mortgage term.
- Variable interest rates can be lower than fixed rates but are not stable and can either increase or decrease over the term of the mortgage. If you’re comfortable with that, this may be the option for you. With a variable interest rate, you can also choose whether your payments are fixed at a certain amount or adjustable.
- Fixed payments with a variable interest rate means that if interest rates increase, more of your payment will go towards paying interest and if the rates go down, more of your payment will be applied to the principal.
- Adjustable payments with a variable interest rate increase or decrease with the interest rate. This is because you’ve ‘locked in’ how much of the principal you want to pay down during the term of the mortgage, which means your payments will either go up or down to accommodate the current interest rate.
Open Mortgages, Closed Mortgages
Your mortgage can either be open or closed. Open mortgages allow you to make extra payments towards the mortgage outside of your regular mortgage payments. These are known as prepayments. Open mortgages also allow you to pay off the mortgage completely, renegotiate the mortgage and change lenders, all before the end of the mortgage term, without paying a penalty. An open mortgage is ideal for borrowers who want the freedom to make lump-sum prepayments when they get the chance, are thinking of moving before the end of the mortgage term or want to pay off the mortgage before the end of the term.
Closed mortgages generally have lower interest rates than open mortgages, but they limit the number of prepayments you can make towards the mortgage. A closed mortgage may be what you’re looking for if you plan on staying in your home for the duration of the mortgage term and if you’re ok with the limits your lender puts on prepayments.
You can choose to pay your mortgage in monthly, semi-monthly (twice a month), biweekly (every two weeks) or weekly instalments. There are also options for accelerated biweekly or accelerated weekly payments that allow you to make an extra month’s payment every year to help you pay off the mortgage faster.
And Finally, Make sure you Understand the Fine Print
There will be more terms and conditions of the mortgage contract when you’re ready to commit to one. Just make sure you ask your mortgage professional about all of them before signing on the dotted line.