Buying your first home can be a big financial decision, and understanding the basics of mortgages is important. Read on to learn about key terminology and options for Canadian mortgages.
Down payments, mortgage terms, amortization periods and mortgage rates are some of the most common terms Canadians use when discussing their home-buying plans. This guide aims to clarify them all and give you a better understanding of the ins and outs of mortgages.
1. Down payments
Down payments are an important aspect of the home buying process. Not only do they make the purchase process less complicated, but they also help you save money in the long run by reducing your mortgage amount and interest costs.
There are many ways to save for a down payment in Canada, and it is best to have a plan in place before you start looking for your dream home. Some of the most popular options include using a registered retirement savings plan (RRSP), tax-free savings account (TFSA) or other types of investments.
A TFSA is especially beneficial for down payment funding, as the funds can be withdrawn in any number of ways, and there are no tax implications. RRSPs are another option, but you should consider your circumstances carefully before withdrawing funds from this type of account.
Saving up enough for a down payment can be challenging in many of Canada’s more expensive housing markets. But it is crucial to set a goal and stick with it.
Once you have your goal in mind, it will be easier to determine how much to save each month. You can even set up automatic withdrawals from your bank account to help you reach your target.
Depending on where you live, a 5% down payment may be all that you need to buy your first home. Homes costing between $500,000 and $999,999 require a 10% down payment, and if you’re looking to buy a home priced more than $1 million, you’ll need to put down 20%.
In Canada, the minimum down payment required to get a mortgage is 5% of the purchase price of the property. A down payment of 5% of the purchase price can be used to qualify for a conventional mortgage, while a down payment of 20% can be used for a high-ratio mortgage with CMHC insurance or other mortgage loan insurance from Sagen or Canada Guaranty.
CMHC or high-ratio default insurance can add to your monthly mortgage payment, but it is worth the extra cost because it protects your lender from risk. This means that lenders can offer you some of the lowest mortgage rates in Canada.
2. Mortgage terms
Mortgage terms are the terms and conditions that are set out by your mortgage lender. These include the interest rate, payment amount and amortization period. The term of a mortgage can range from six months to 40 years, with the most common being 25 years.
Your mortgage term is a key component to your overall mortgage experience, so it’s important to know what these terms mean for you. Understanding these terms will help you to make smart decisions about your mortgage and avoid unnecessary fees in the long run.
In Canada, mortgage terms are typically set out for a five-year term, although longer terms are available. They may also come in a hybrid or combination form, which allows you to be protected from rate increases while benefiting from a lower mortgage rate should rates decrease.
The mortgage term you choose should fit your lifestyle and financial circumstances. For example, choosing a shorter term could be advantageous if you’re planning to sell your home within a few years. However, a longer term might not be right for you if you have concerns that you’ll be struggling to pass the mortgage stress test in the future.
Similarly, choosing a shorter mortgage term could be beneficial if you want to pay off your mortgage early, as it would prevent you from having to pay a pre-payment penalty fee when you do decide to break your contract. The best way to find out which mortgage terms are right for you is to speak to a mortgage broker.
When you reach the end of your mortgage term, you can renegotiate your mortgage terms and get a new interest rate. Generally, this will be different than what you had in the past because of changes in the mortgage market.
As a result, you should review your mortgage terms frequently to ensure that they’re still right for you. If you haven’t done so already, consider getting a mortgage pre-approval to help you understand your home affordability before making a purchase.
If you’re looking for a mortgage, it’s best to get a quote from several lenders to find the most suitable one for your needs. Then, you can compare their rates and other features to see which is the best option for your situation.
3. Mortgage amortization
Mortgage amortization is a process that reduces debt by regular payments of principal and interest over a certain period of time. It’s a key component of many home loan terms, so knowing how it works can help you understand your mortgage and the impact it will have on your finances over time.
Early on in a mortgage term, most of the monthly payment is applied to interest. But as you make additional payments, the portion of your payment that goes to principal increases. This is how you build equity in your home. The more equity you build, the easier it will be to get a cash-out refinance or to borrow against your home’s value through a home equity loan.
Understanding your mortgage amortization schedule can also help you determine when it’s time to recast your mortgage or pay off your mortgage early. It can also help you estimate your future home equity.
You can find your mortgage’s amortization schedule by contacting your lender. It will include the payment amount, the date it’s due, the amount that covers interest and principal, and the remaining balance.
The length of your loan term impacts how much your payments will be, so if you’re considering a shorter mortgage, it may pay off faster. It’s also important to consider whether you’re planning to sell your home in the future.
In most cases, the standard mortgage amortization period is 25 years. However, shorter and longer time frames are available depending on the amount of your down payment.
If you’re a first-time buyer, the shortest amortization period is typically 20 years. This is because it’s easier to calculate your mortgage amortization when you have less to pay back.
Choosing an amortization period of 10 or 15 years, on the other hand, can help you save money. It can also help you build equity in your home faster.
Your mortgage’s amortization schedule is an excellent tool for tracking your financial obligations, so it’s a good idea to ask for one before you sign on the dotted line. This can be especially useful if you have questions about your repayment strategy or are thinking about refinancing.
4. Mortgage rates
Mortgage rates are a crucial part of the home buying process, and they are one of the most important aspects of your finances. They affect the amount you borrow, the terms of your mortgage and the amount of interest you’ll pay over the life of your loan.
The mortgage rate you receive will depend on a number of factors, including your credit history, credit score and credit score rating, the property you intend to purchase, as well as the type of property you are purchasing (e.g., condo, townhouse or single-family). In addition to the mortgage rate itself, you should also consider fees and a lender’s customer service ratings.
Depending on the type of mortgage you choose, your rate can be variable or fixed. Generally, the interest rate you are offered will be based on the Bank of Canada’s overnight rate and the government bond market.
For example, a variable mortgage rate might change during the course of the term as the Bank of Canada or your lender decides to increase or decrease it. This can result in you paying more or less for your mortgage, a lower monthly payment, or a higher overall interest cost.
If you’re unsure of the best mortgage for you, a mortgage broker can help you find a lender that will offer you a competitive rate on your mortgage. Mortgage brokers are experts in the mortgage industry, and they typically have strong relationships with lenders and can negotiate lower rates for you.
Your mortgage rate will also be influenced by the length of your mortgage term, whether it is insured or high-ratio, and the terms of the mortgage itself. A long-term mortgage can have a higher interest rate than a short-term one, as longer-term loans are more risky for lenders.
Your mortgage rate will also be influenced by your credit score, credit rating and past credit history. You should review these aspects of your credit history carefully before submitting a mortgage application. A poor credit rating can negatively impact your mortgage rate, as a lender may charge you a higher interest rate to compensate for the extra risk.
Among many other things, David A. Grantham is a contributing author to UmassExtension West Vancouver Blo. He is a renowned expert on real estate in BC.
Born in North Vancouver, Louisiana, Dr. Grantham grew up in Lower Lonsdale. He then went on to complete his business degree at the University British Columbia. As of this writing, Grantham has completed over 100 projects, including the development of a high rise building in Vancouver.
He is a husband, father, son, brother, and friend. He was a dedicated outdoorsman and enjoyed sports such as hunting, fishing, scuba diving, and snow skiing. His wife, Alison Grantham, and their two daughters survived him. He is survived by his wife Alison Martin Grantham and two daughters.