Applying for a mortgage can seem overwhelming at first but when you understand the process you can make decisions with confidence.
What Is a Mortgage?
A mortgage is a loan secured by real estate. Your mortgage is supplied by a lender, usually a bank or credit union, and paid back in blended payments of interest and principal.
DID YOU KNOW? “The key to saving money on your mortgage is to pay off the principal as fast as possible. If you can make extra payments under the terms of your mortgage, the lender will apply them directly to the principal. By reducing the principal, you can save thousands, or even tens of thousands, of dollars in interest charges.” (Government of Canada)
What is a Pre-approval Mortgage
Being pre-approved for a mortgage can save you time, help establish your price range, and will guarantee you the best rate in the period you negotiate with your lender. It’s important to have a thorough pre-approval before you go out shopping. Your lender will require income verification and a credit check, and will have you fully vetted before you begin viewing real estate.
Understanding the Different Types of Mortgages
There are many types of mortgages available including:
- Open Mortgages: An open mortgage offers the most flexibility and is best for homeowners who want to make large payments on their mortgage with no penalties. The freedom offered with this type of mortgage is usually accompanied by fluctuating interest rates.
- Closed Mortgages: A closed mortgage has a strictly predetermined interest rate for a predetermined period of time. One cannot renegotiate, refinance, or prepay their mortgage, and will be penalized if they do so.
- Convertible Mortgages: A convertible mortgage allows the homeowner to start their term with the benefits of an open mortgage, but change to a fixed-rate closed mortgage at any point during their term.
- Hybrid Mortgages: A hybrid mortgage allows the homeowner to split their mortgage into multiple parts, each with their own interest rate and terms. The homeowner will benefit from both fixed and variable interest rates and also protect themselves from possible market fluctuations.
- Reverse Mortgages: A reverse mortgage allows homeowners 55+ to have their home equity, or the amount they have paid into their mortgage, returned to them as a loan. The loan is not due to be repaid until the homeowner moves, sells their home, or passes away.
Your mortgage broker will be able to provide you with information on the pros and cons of the various options.
Term vs. Amortization
It can be difficult to understand your mortgage when you aren’t familiar with the terminology. Two phrases you will want to remember are mortgage term and amortization period. These two phrases are a common cause of confusion among new home buyers as they are similar in definition but mean different things.
A mortgage term refers to the period of time that you are committed to the terms and conditions of the mortgage, including the interest rate and lender. A mortgage term can range from 6 months to 10 years. At the end of the term, you can renew your mortgage, refinance it, or pay off the remaining balance in full.
The amortization period refers to the period of time it will take you to repay your entire mortgage. A shorter amortization period will result in higher monthly payments but lower interest payments. In contrast, a longer amortization period will result in lower monthly payments, but higher interest payments. The average maximum amortization period is 25 years, though buyers who pay a down payment of 20% or more may be eligible for a longer amortization period. I encourage you to discuss your options with your mortgage specialist to find the best mortgage term and amortization period for you.
What If I Sell Before My Mortgage Term Is Up?
If you decide to move on from your home when there is time left on your mortgage term, you have some options to choose from:
- If you are buying a home at the same time as you are selling, you may (depending on the terms of your mortgage) transfer your existing mortgage, including its interest rate and terms, to the home you are buying. This is also known as “porting” your mortgage. If you require a larger mortgage for your new home, your mortgage lender may offer you a “blend and extend”, where your lender will renegotiate a new interest rate in between your previous rate and the current average. If you are buying a home with a mortgage value lower than your current mortgage, you may need to make arrangements with your lender. There could be a penalty.
- If the value of your home has increased since the time of purchase, you can use the proceeds of the sale of your home to pay off the remainder of your mortgage. Depending on the type of mortgage you have, you may be subject to a prepayment penalty fee. Most mortgage lenders will have a prepayment penalty calculator on their website. The cost of the prepayment penalty fee will depend on your mortgage lender and a variety of factors, such as how long is left in your term, your interest rate, and how much you are prepaying.
There are many things to consider when purchasing a home, and I am committed to helping you with real estate. Whether you have questions about understanding your mortgage or wish to discuss the current value of your home, feel free to give me a call at 604 302 0177 — let’s talk!
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