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Balancing mortgage rate (Comstock Images/Getty Images/Comstock Images)
Balancing mortgage rate (Comstock Images/Getty Images/Comstock Images)

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Home ownership isn't for everyone Add to ...

Remember, the longer the amortization period you choose, the longer you will be locked into making mortgage payments and the more interest you will pay in total. So people are beginning to ask whether there is any advantage to being locked into mortgage payments as opposed to paying rent. The answer is not as clear as many once thought it to be. The key is paying off the mortgage as quickly as you can, minimizing the interest you pay, and taking complete control of the house as early as you can.

If you can, once higher interest loans, such as credit card balances, have been repaid, make periodic extra payments against your mortgage. This will reduce the time it takes you to pay off the mortgage. As a result, you will pay much less interest over the whole amortization period of the mortgage. Many mortgages allow you to make such early repayments any time, with no fees or penalties. If the mortgage you are considering from a lender does not allow this, I would look for a different lender.

19 The government changed the amortization to 30 years because Canadian debt burdens had hit the highest levels on record, with a hope to reduce interest payments and have mortgages paid off by retirement. A change was also made when refinancing your mortgage, now you can borrow a maximum of 85% (it was 90%) of the value of your home mortgage. With a fixed rate mortgage, you benefit from the security of locking in your interest for a fixed period of time. Fixed mortgages have terms from 6 months to 10 years and your payments will not change during that period.

Mortgage Types

There are two basic types of mortgage: fixed and variable. Careful thought should you go into choosing your mortgage type. Typically, if you are risk adverse, you should choose a fixed

Most Canadians prefer fixed rate mortgages. They give you the peace of mind knowing how much money to set aside each month for the mortgage payment for the term of the mortgage. Just before the maturity of the five-year term, the lender will send you a renewal note with its current interest rate offers. Only at that time will you need to decide again what kind of mortgage and what term you would like. If interest rate rises during the term of your mortgage, you will not pay anything extra. However, if interest rates fall, you will continue paying the same amount.

At the end of the term, if interest rates are much higher, you will get a shock and have to adjust your lifestyle or perhaps extend the period in which you are repaying the mortgage by going back to the same length of amortization with which you started. As a worst case scenario, you may have to sell your home and down-size. In Canada, you can no longer walk away from the property and stick the lender with having to sell it to recuperate the amount of the mortgage.

A variable mortgage allows the interest rate you pay to change during the term of the mortgage. This gives you the benefit of getting a lower interest rate if rates are falling. Of course, the reverse is true: if rates are rising, you will pay more.

Most variable rate mortgages are convertible mortgages periodically, allowing you to change to a fixed rate mortgage with no penalties.

You monthly mortgage payment can be set up as a fixed payment or can vary along with interest rate movements. When the payment is constant and the interest rate starts to drop, as less interest needs to be paid, a bigger part of each payment will be applied to the principle of the loan, so you will pay the loan down faster. Of course, the opposite happens when the interest rate stars climbing, more will go to interest, less to principle, and you will take longer to repay the money.

If you monthly payment is not set, it can be difficult to budget if interest rates are on the rise. If you are on fixed income, you will have to adjust other expenses to get the money you need to cover you mortgage payments.

Variable rate mortgages are for people who live with short-term uncertainty. They are not necessarily more risky than fixed rate mortgages, they just carry a different kind of risk. The interest rate is based on the bank's Prime Rate (overnight Bank of Canada rate plus additional bank premium). All the banks have the same Prime Rate or very close to it. You should ask your lender for a discount on the prime rate. Historically variable rate mortgages could get a discount up to 1% off the prime rate. Please negotiate the discount with your bank (see the Rate Negotiation section).

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