Buying a home – especially a first home – brings an adrenaline rush. It’s a turning point in your life, whether it’s a place to raise a family, a fresh start in a new town or an investment property. But why do you have that lump in your throat?
Because it’s probably the biggest financial commitment you’ll ever make, at least until your next home. If you’re taking out a mortgage – and you probably are – it’s very important to understand the choices you are making.
“Consumers are wise to do some research before they go in to negotiate a mortgage, and they should be comfortable with the person they’re talking to,” says Jim Murphy, president and chief executive officer of the Canadian Association of Accredited Mortgage Professionals (CAAMP) in Toronto. “They should feel free to ask lots of questions and ask for clarification, and especially they should ask why the person is suggesting certain products or features. That’s because they need to be absolutely comfortable with their choices in the end.”
Research can begin online. At the websites for CAAMP and the major banks, you can find glossaries of terms, calculators and tutorials. Once you have armed yourself with basic knowledge, you can approach a bank lender or mortgage broker.
The advantage of going to a broker is the access to multiple lenders, says Mr. Murphy. In these times of low advertised rates, many home buyers are now directly approaching the institution with the best rate. But a broker will take your income – supported by your recent Notices of Assessment from the Canada Revenue Agency – and your credit history, along with your proposed home purchase, and shop it around to a variety of banks, credit unions and trust companies to obtain the best deal.
The mortgage rate is only one part of an equation that also includes the ability to pay off the mortgage early, portability to another home if you should decide to move and your terms are favourable, and the ability to renegotiate if rates change, Mr. Murphy says.
The first decision for most mortgage holders is the term – how long their mortgage lasts until they must renegotiate. Terms can run from six months to 10 years with shorter-term mortgages carrying lower interest rates. But most people choose five-year mortgages, Mr. Murphy says.
“They like the predictability. They know the rate and what the payments will be.”
Essentially, if you think interest rates will fall in the short term, choose a short term and then, perhaps, lock in a lower rate at renewal. If you believe interest rates will rise, choose a longer term at the best available rate now.
Next, you will choose between a fixed rate, where you pay a pre-determined interest rate over the term, and a variable rate. Again, the attraction of fixed rates is predictability, Mr. Murphy says. With a variable rate, you still make fixed payments but the interest rate varies with the Bank of Canada rate. If rates go down, more of your payment goes to principal. If rates go up, more goes toward interest. “A lot of variable mortgages allow you to lock in if rates start to rise,” Mr. Murphy says. “If you are interested in that, ask about the costs or penalties if you take advantage of that feature.”
Deciding to make more frequent mortgage payments can dramatically affect your accumulation of equity and how soon you will pay off your mortgage. “More people are opting for bi-monthly or weekly payments instead of the usual monthly payment,” says Mr. Murphy. “Spreading almost the same amount over 48 or 52 payments a year instead of 12 will help you to pay down your principal more quickly.”
Amortization is a further consideration. The amortization period is the number of years it will take to pay off the entire amount. The longer the amortization period, the lower your monthly payments will be. Currently, the maximum amortization period to qualify for government-backed Canada Mortgage and Housing Corp. insurance is 30 years, although the government is currently considering a proposal to cut it to 25 years.
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