Choosing a mortgage that is right for you
What is a mortgage
When you buy a home, you may only be able to pay for part of the purchase price. The amount you pay is a down payment. To cover the remaining costs of the home purchase, you may need help from a lender. The loan you get from a lender to help pay for your home is a mortgage.
A mortgage is a legal contract between you and your lender. It specifies the details of your loan and it’s secured on a property, like a house or a condo.
With a secured loan, the lender has a legal right to take your property. They can do so if you don’t respect the conditions of your mortgage. This includes paying on time and maintaining your home.
Unlike most types of loans, with a mortgage:
- your loan is secured by a property
- you may have a balance owing at the end of your contract
- you normally need to renew your contract multiple times until you finish paying your balance in full
- you may have to meet qualification requirements including passing a stress test
- you need a down payment
- you may need to break your contract and pay a penalty
- your loan is typically for an amount in the hundreds of thousands of dollars
What to consider when getting a mortgage
When you shop for a mortgage, your lender or mortgage broker provides you with options. Make sure you understand the options and features. This will help you choose a mortgage that best suits your needs.
This includes your:
- mortgage principal amount
- payment frequency
You can find information on each of these features in the sections below. For more detailed information on each item, click on the links provided.
The mortgage term is the length of time your mortgage contract is in effect. This consists of everything your mortgage contract outlines, including the interest rate. Terms can range from just a few months to 5 years or longer.
At the end of each term, you must renew your mortgage if you can’t pay the remaining balance in full. You’ll most likely require multiple terms to repay your mortgage.
The length of your mortgage term has an impact on:
- your interest rate and the type of interest you can get (fixed or variable)
- the penalties you have to pay if you break your mortgage contract before the end of your term
- how soon you have to renew your mortgage agreement
How your mortgage amount is calculated
The amount you borrow from a lender for the purchase of a home is the principal amount.
This amount usually includes the:
- purchase price of the home minus your down payment
- mortgage loan insurance if your down payment is less than 20% or if it’s required by your lender
How your mortgage payments are calculated
Mortgage lenders use factors to determine your regular payment amount. When you make a mortgage payment, your money goes toward the interest and principal. The principal is the amount you borrowed from the lender to cover the cost of your home purchase. The interest is the fee you pay the lender for the loan. If you agree to optional mortgage insurance, the lender adds the insurance charges to your mortgage payment.
The amortization period is the length of time it takes to pay off a mortgage in full. The longer the amortization period, the lower your payments will be. Keep in mind that the longer you take to pay off your mortgage, the more interest you pay.
If your down payment is less than 20% of the purchase price of your home, the longest amortization you’re allowed is 25 years.
Your interest rate
The interest is the fee you pay to the lender for borrowing money. The higher your interest rate, the higher your mortgage payments will be. Every time you renew your mortgage term, you renegotiate your mortgage interest rate. This means your mortgage payments can be higher or lower in the future.
When you apply for a mortgage, your lender offers you an interest rate. You can negotiate this rate to see if they can offer you a lower rate.
The interest rate your lender offers you may depend on:
- the length of your mortgage term
- the type of interest you choose
- the current posted interest rate offered by your lender
- your credit history
- if you’re self-employed
- if you qualify for a discounted interest rate
- the type of lender you choose like a bank, credit union, financing company or mortgage investment company
- the specific lender
Before you commit to a lender, shop around to get the best rate for you. This could save you thousands of dollars.
Types of interest
When you apply for a mortgage, your lender may offer different interest options.
Fixed interest rate
A fixed interest rate stays the same for the entire term. They are usually higher than variable interest rates. With a fixed interest rate, your payments will stay the same for the entire term.
Variable interest rate
A variable interest rate can increase and decrease during the term. Typically, the interest rate is lower with a variable interest rate than a fixed interest rate.
With a variable interest rate, you can keep your payments the same for the duration of your term. Lenders call this a fix payment with a variable interest rate. You also have the option to opt for an adjustable payment with a variable rate. With adjustable payments, the amount of your payment will change if the rate changes.
Hybrid or combination interest rate
A hybrid or combination mortgage has both fixed and variable interest rates. Part of your mortgage has a fixed interest rate, and the other has a variable interest rate. The fixed portion gives you partial protection in case interest rates go up. The variable portion provides partial benefits if rates fall.
Each portion may have different terms. This means hybrid mortgages may be harder to transfer to another lender.
Payment frequency refers to how often you make your mortgage payments. You can also choose an accelerated payment schedule. Accelerated payments allow you to make the equivalent of one extra monthly payment each year. This can save you thousands, or tens of thousands of dollars in interest over the life of your mortgage.
Your payment frequency options may include:
- Monthly—1 payment per month
- Semi-monthly—2 payments per month (monthly payment ÷ 2)
- Biweekly—1 payment every 2 weeks (monthly payment X 12 ÷ 26)
- Weekly—1 payment per week (monthly payment X 12 ÷ 52)
- Accelerated biweekly—1 payment every 2 weeks (monthly payment ÷ 2)
- Accelerated weekly—1 payment per week (monthly payment ÷ 4)
Your property taxes
As a homeowner, you have to pay property taxes on your home. The amount you pay depends on the value of your home and where you live.
Some financial institutions collect and pay your property taxes for you. This may also be a condition of financing. If that’s the case, your lender adds the property tax amount to your regular payments.
How your mortgage choices can affect your future
Mortgage lenders charge a penalty fee when you break your contract. This means, if you sell your home, you could owe the lender thousands of dollars in penalty fees.
You could also pay penalty fees if you pay off your mortgage early. Unless you plan on owning your home until you pay it in full, you may need flexibility on your mortgage.
Options related to mortgage flexibility include if your mortgage:
- is open or closed
- is portable
- is assumable
- has a standard or collateral security registration
Open and closed mortgages
There are a few differences between open and closed mortgages. The main difference is the flexibility you have in making extra payments or paying off your mortgage completely.
The interest rate is usually higher than on a closed mortgage with a comparable term length. It allows more flexibility if you plan on putting extra money toward your mortgage.
An open mortgage may be a good choice for you if you:
- plan to pay off your mortgage soon
- plan to sell your home in the near future
- think you may have extra money to put toward your mortgage from time to time
The interest rate is usually lower than on an open mortgage with a comparable term length.
Closed term mortgages usually limit the amount of extra money you can put toward your mortgage each year. Your lender calls this a prepayment privilege and it is included in your mortgage contract. Not all closed mortgages allow prepayment privileges. They vary from lender to lender.
A closed mortgage may be a good choice for you if:
- you plan to keep your home for the rest of your loan’s term
- the prepayment privileges provide enough flexibility for the prepayments you expect to make
If you sell your home to buy another one, a portable mortgage allows you to transfer your existing mortgage. This includes the transfer of your mortgage balance, interest rate and terms and conditions.
You may want to consider porting your mortgage if:
- you have favourable terms on your existing mortgage
- you want to avoid prepayment penalties for breaking your mortgage contract early
Check with your lender to see if your mortgage is eligible for porting. Ask about any restrictions that may apply.
If your new home costs less than the amount you owe on your mortgage, you may pay a prepayment penalty. Ask your lender for details if you need to borrow more money for your new home.
An assumable mortgage allows you to take over or assume someone else’s mortgage and their property. It also allows someone else to take over your mortgage and your property. The terms of the original mortgage must stay the same.
You may want to consider an assumable mortgage if:
- you’re a buyer and interest rates have gone up since you first got your mortgage
- you’re a seller and want to move to a less expensive home but want to avoid prepayment fees because you have several years left on your existing term
Most fixed-rate mortgages can be assumed. Variable-rate mortgages and home equity lines of credit can’t.
The lender must approve the buyer who wants to assume the mortgage. If approved, the buyer takes over the remaining mortgage payments to the lender. The buyer is also responsible for the terms and conditions set out in the mortgage contract.
In some provinces, the seller may remain personally liable for the assumable mortgage after the sale of the property. If the buyer doesn’t make their mortgage payments, the lender may ask the seller to make the payments. Some lenders may release the seller from the responsibility if they approve the buyer for the mortgage.
Check with your lender to see if your mortgage is assumable. Lenders may charge you a fee to assume a mortgage. Your mortgage contract indicates if you need to pay a fee to complete the transfer.
Standard and collateral charges
A mortgage is a loan secured by property, such as a home. When you take out a mortgage, the lender registers a charge on your property. The type of charge determines which loans your lender allows you to secure against your property.
A standard charge only secures the mortgage. It doesn’t secure any other loans you may have with your lender, such as a line of credit. The charge is registered for the actual amount of your mortgage.
With a collateral charge mortgage, you can secure multiple loans with your lender. This includes a mortgage and a line of credit.
The charge can be registered for an amount that is higher than your actual mortgage. This allows you to borrow additional funds on top of your original mortgage in the future. You avoid paying fees to discharge your mortgage and register a new one. You only have to make payments, including interest, on the money you actually borrow.
Optional mortgage features
Cash back is an optional feature on some mortgages. It gives you part of your mortgage amount in cash right away. It can help you pay for things you need when you get a home, such as legal fees.
Usually, if you use the cash back feature, your interest rate is higher. The amount of interest you’ll pay may end up costing you more money than you get as cash back.
Your lender can put limits on the cash back feature. For example, you may not be able to use cash back funds as part of your down payment.
Your lender may ask you to repay some or all of the cash back amount. This typically happens if you decide to break your mortgage contract before the end of the term.
Home equity lines of credit (HELOC)
A HELOC is a secured form of credit. The lender uses your home as a guarantee that you’ll pay back the money you borrow. Most major financial institutions offer a HELOC combined with a mortgage under their own brand name. It’s also sometimes called a readvanceable mortgage.
HELOCs are revolving credit. You can borrow money, pay it back, and borrow it again, up to a maximum credit limit. It combines a HELOC and a fixed-term mortgage.
You usually have no fixed repayment amounts for a home equity line of credit. Your lender generally only requires you to pay interest on the money you use.
Your lender may require you to get title insurance as part of your mortgage contract. The title on a home is a legal term used to define who owns the land. When you buy a home, the title on the house is transferred to you.
Title insurance protects you and your lender against losses related to the property’s title or ownership. For example, title insurance protects you from title fraud.
Title fraud happens when the title to your home is stolen, and then the fraudster:
- sells the home
- applies for a new mortgage against it
There are two types of title insurance:
- lender title insurance: protects the lender until the mortgage is paid in full
- homeowner title insurance: protects the homeowner as long as you own the home, even if there’s no mortgage
When you get title insurance, you pay a one-time cost, based on the value of your home. The one-time cost is a premium. Premiums generally cost between $150 and $350 but could cost more. If you don’t buy title insurance right away, you can buy it at a later date.
Title insurance is available from:
- your lawyer (or notary in Quebec and British Columbia)
- title insurance companies
- insurance agents
- mortgage brokers
Mortgage life, disability, and critical illness insurance
Optional mortgage insurance products include life, illness and disability insurance. These optional products are different from mortgage loan insurance.
They can help you make your mortgage payments, or help pay off the balance on your mortgage if you:
- lose your job
- become injured or disabled
- become critically ill
Your lender might offer you optional mortgage insurance when you get a mortgage. You don’t need to purchase the insurance to be approved for a mortgage. The lender adds the cost of these optional products to your mortgage payment.
There are important limits on the coverage that optional mortgage insurance products provide. Read your policy carefully and ask questions about anything you don’t understand before purchasing these products.
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