Mortgage rates are currently very low across Canada, significantly lower than rate trends from the past 15 years. It may be a great time for refinancing or applying for a mortgage when purchasing a new home, depending on your individual situation.
*graph updated December 3rd, 2021
How to Choose a Mortgage
What is a mortgage?
A mortgage is an agreement between the home buyer (also known as the borrower) and a mortgage lender to buy or refinance a property without having the money to purchase that home upfront. The lender loans the home buyer the funds to purchase the home and repay the lender the money they’ve borrowed plus interest based on the current mortgage rate. The agreement gives lenders the legal rights to repossess the property if the borrower fails to meet the terms of their mortgage, such as failing to repay the amount borrowed plus interest.
How does term impact my mortgage?
An important consideration when choosing a mortgage is the length of the term. The term is the amount of time the mortgage rate will be set for and after this time the mortgage rate will need to be renegotiated and the mortgage refinanced under another term. Selecting a term for a mortgage is a personal decision and may be impacted by current rates. For example, as the current rates are the lowest they have been in a very long time many would prefer a longer term under that rate. It’s important for borrowers to select the term that best fits with their budget, lifestyle, and income.
What's the typical mortgage amortization period in Canada?
The amortization period is the time it takes a borrower to actually pay off their mortgage. The most common amortization period is 25 years but this can vary from as low as 10 years to as long as 30 years depending on individual situations.
Selecting the right amortization period is all about the home buyer’s current situation and how they are planning to budget their money. Some borrowers opt to pay more on their payments to reduce the amount of interest paid over time. It is a personal choice that buyers will have to consider when selecting their mortgage options.
How do current rates impact my mortgage?
Mortgage rates right now in Canada are very low. The rate of a mortgage determines what the mortgage will cost a borrower. The higher the rate, the higher the payments on the mortgage loan.
Rates can be broken down into two categories, fixed and variable.
Fixed vs Variable Rates
Fixed rates are set for the duration of the mortgage term. The rate the buyer locks in at will remain their rate for the entire length of the agreed upon term. With rates currently very low, many opt for this option to ensure they will have nothing to worry about should rates rise. A fixed rate creates a predictable payment that is easy to budget for during the mortgage term.
Variable rates change as the Bank of Canada interest rate, known as the prime rate, changes. Often these rates seem riskier, due to their ability to change and the uncertainty associated with not knowing how payment amounts may change, but they are historically less expensive. The economy and market determine how home buyers will be impacted by these rates.
Rates are very important to consider when choosing a mortgage.
What are the payment schedule options with a mortgage?
Based on the home buyer’s income and budget, a payment schedule will be an important consideration when choosing a mortgage. There are three main options.
For a monthly payment schedule, the yearly payment will be divided by 12 and the borrower will be billed on the same day every month. A monthly payment schedule is the lowest payment frequency that can occur.
Bi-weekly payments are created by taking the monthly payment multiplied by 12 and then divided by 26.
The accelerated bi-weekly payment schedule takes the monthly payment and divides it by two. The borrower is still making 26 payments throughout the year, but the payments are slightly higher which means the mortgage can be paid off faster.
What is the penalty if I want to exit my current mortgage early?
This is an important penalty you should be aware of ahead of exiting your current mortgage early. Depending on the contract and timing, these fines can be quite hefty and might make selling or re-mortgaging your home quite expensive. Sometimes, the bank will port your mortgage over to your new home which might reduce the penalty. Before making a decision, it’s best to chat with your lender about the amount of a potential penalty.
What is a CMHC-insured mortgage loan?
CMHC mortgage loan insurance lets you get a mortgage for up to 95% of the purchase price of a home. It also ensures you get a reasonable interest rate, even with your smaller down payment.
To get mortgage loan insurance, you’ll need a minimum down payment. The amount depends on the home’s purchase price. A home less than $500K requires a minimum down payment of 5%. A home more than $500K requires 5% on the first $500K and 10% on the remainder. Homes that cost more than $1M are not eligible for mortgage loan insurance.
Your lender will pay the insurance premium on mortgage loan insurance which is calculated as a percentage of the mortgage and is based on the size of your down payment. This cost will likely be passed to the buyer and can either be included in your payments or paid as a lump sum.
What other factors are important to consider when choosing a mortgage?
These factors are also important to evaluate when looking at mortgage options.
- The amount saved between different options
- Prepayment privileges and penalties
- The portability of the mortgage to another property
- Standard charge vs collateral charge
How do I get started on the application process?
I think we can all agree that the best application processes are those that are easy and quick. Trilogy mortgage uses an entirely online process to help buyers and homeowners get approved. Start your application by clicking the button below.