Factors To Consider In Getting A Good Mortgage

Choosing the right mortgage product can have a lot of significantly positive impact in your finances and your life. Not only can it put more money saved in your account over the long term, it can also help you pay off your mortgage faster and have more time to enjoy life, when coupled with wise financial planning.

While a mortgage is basically a type of debt that is secured against a real estate property, you may choose various options and features for it depending on your needs, goals and risk tolerance. In Canada Mortgage Hub, we help you figure out a strategy that will fit your objectives. Part of that strategy is selecting the right type of mortgage to fulfill your immediate and long-term needs.

Listed below are several factors you need to consider in getting a mortgage. (Simply click on one of the factors to see the detailed explanation about it.) 

Rate Type – Fixed, Variable or Adjustable Rate Mortgages

Fixed Rate Mortgages have interest rates and monthly payments which are fixed throughout the term. It is usually calculated based on the bond market rates. If you know or want to know exactly how much you are paying, it simplifies budgeting and offers the stability of knowing your rates and payments won't go up. The down side to it is that more of the initial years of payments go towards interest payments than the principal. Building up equity by paying down your mortgage balance is, therefore, slower. In cases where rates are low and you opt for a fixed rate mortgage, it is sometimes better to take a longer term to protect against any rate increase.

Variable Rate Mortgages, on the other hand, has rates that vary with the fluctuations in the lender's prime rate or their guaranteed investment certificate rate. (Prime rate is usually calculated based on the Bank of Canada rate setting policies.) Either a fixed discount or mark-up may be applied to their prime rate. It has fixed payments like a fixed-rate mortgage but payments that go towards the principal portion fluctuates with interest rate changes. If prime rates go down, there is more chance to build equity as more of the payment go towards the principal. However, if rates rise substantially, and you do not have a cap on your rate, your payments may not be enough to cover both interest and principal and you may be asked to increase your monthly payment. Over the last 25 years though, it has been shown that choosing a variable rate over fixed one has been a better choice. If you can handle the ups and downs of prime rates, then it is a good option to get.

Adjustable Rate Mortgages are mortgages for which the payments change as the interest rate is adjusted periodically according to movements in a pre-selected index (usually the bank's prime rate). When rates go down, you pay less interest and your payments also go down with the newly adjusted rate. The negative side of this is that there is uncertainty, as prime rates can increase and payments can go up accordingly. If you can handle the prime rate fluctuations, then this is a choice.

Both the Variable and Adjustable Rate Mortgages are also suitable for those with good equity in their home or have strong growth in their investment portfolios. Moreover, if they are capped, the lender may set a maximum rate limit so your payments can't go over a certain amount, but they usually charge a premium for this. Others offer "teaser" rates in the first 3- 9 months.

Getting an open or convertible variable in order to lock into a fixed rate anytime is a wise option as well if you want both flexibility and certainty.

Back to Top

Open Mortgages versus Closed Mortgages

Open Mortgages can be prepaid at any time, without penalty. Their rates are usually tied to the Bank Prime and they are mostly underwritten for a short term (6 months or 1 year). No penalties are triggered if the borrower wishes to end the contract or pay off the mortgage before the term expires. Although their interest rates are higher than closed mortgages (as much as 1% or more), borrowers normally choose it if they expect to get out of their mortgages sooner but don't know exactly when. For example, if you buy a property to renovate and sell at a higher price, you may know exactly when you'll finish renovating, but probably not when you can actually sell the place. Getting an open mortgage lets you pay a higher interest but you do not pay any penalty once the house is sold and the mortgage is paid off. The savings you can get from not paying a penalty could most likely be more than what you would spend on a higher interest. Open mortgages are also good to get if you believe rates will be coming down and you want the flexibility to convert to a closed one when they do decrease.

Closed Mortgages cannot be repaid in full during their term. Otherwise, penalties apply. Rates are usually lower than those of open mortgages and you can choose terms ranging from 6 months to 10 years. Closed mortgage can have fixed, variable or adjustable rates. Opting for a closed mortgage with a fixed rate lets you "tie down" your payments for a chosen term (number of years). Therefore, it offers you the security in knowing you'll never pay more than what rate/payment you signed for, and budget for that accordingly. It also allows you to capitalize on the rates for a specific period in times when they are very low.

The penalty applied in paying off the mortgage before the term ends is usually 3 months interest, or interest rate differential (I.R.D.). In some contracts, the penalty is whichever is higher between the two. For a more detailed explanation of these penalties, you may go to the "Frequently Asked Questions" section of our site and look at the question:
Is there ever a good time to "break" my closed mortgage and pay the prepayment penalties?.

Some closed mortgage contracts allow prepayment of a portion of their principal, for example, once a year on their anniversary date. Make sure you understand exactly what is allowed for principal prepayment, at what additional cost, and how much notice must be given for each prepayment.

Choosing between an open and a closed mortgage is like deciding whether or not you are willing to pay a penalty should you pay off your mortgage earlier than its term. It all depends on your situation and what you need financing for. There are some lenders who may also stipulate in their closed mortgage contract that the mortgage will convert into an open one after several years into the term. If you want to know the best mortgage option for your situation, speak to us and we can help find a mortgage that is most suitable for what you need.

Back to Top

Conventional versus Hi-Ratio/Insured Mortgages

Conventional Mortgages requires at least 20% downpayment from the borrower. It provides financing for 80% or less of the appraised value or purchase price (usually whichever is lower) of the property. No insurance and/or mortgage broker fee is usually required.

Hi-Ratio or Insured Mortgages provides financing for more than 80% of the appraised value or purchase price (usually whichever is lower) of the property. It requires a downpayment from the borrower of only 20% or less. Therefore, it allows you to purchase a home with minimal or no down payment. However, you will need to pay an insurance premium fee, which can also be added to the mortgaged amount. The premium paid usually depends on the amount of downpayment you put. If the mortgage was obtained after April 1997, this premium is portable to another property. The lender and insurer must both approve of the credit(s) of the applicant(s).

Note: A longer-term CMHC-insured mortgage can be pre-paid in full with only 3-months interest penalty. This makes it cheaper to switch to a lower-rate mortgage should the rates drop as compared to one where the penalty is calculated based on an Interest Rate Differential.

Non-Conforming Hi-Ratio/Insured Mortgages are designed for people who need a conventional or high ratio mortgage but do not meet the lender/bank guidelines or that of the insurer, due to challenged credit, derogatory issues in their credit report, or other factors that could pose enough risk to lenders that they will require the mortgage to be insured. Although it allows up to 100% financing (subject to approval), a higher-rate premium needs to be paid (or added to the mortgage), depending on the risk factor(s), amount of down payment and type of property financed. Mortgage broker fees may also apply. If it does, it will need to be paid in full before the deal closes.

Back to Top

Short-term versus Long-Term Mortgages

A term is the length of time covered by a mortgage agreement. It is the actual length of time for which the money is loaned at a particular rate of interest. It also indicates when the principal balance becomes due and payable to the lender. Payments made throughout the term may not repay the outstanding principal by the end of it because of a longer amortization period. However, after the term expires, you can either repay the balance of the principal then owing, or renew it by renegotiating the mortgage at current rates and conditions, with the same or a different lender. Using our service at such point is beneficial as we have access to over 40 lenders and we can help you negotiate the best rates.

In general, the longer the term, the higher the rate. If you choose a closed mortgage, there are penalties involved with getting out of it so choose the term carefully. Knowing what kind of penalty is involved (i.e. 3 months interest penalty of Interest Rate Differential). Longer terms are good if you think the rates are low enough and you want to lock-in for long term so you do not have to worry about any possible increase. If the mortgage is also assumable and the rate you got it for is low, it could be an attractive feature in selling your home to someone who wants to assume it, especially when rates have gone up. Otherwise, it may be portable and you can transfer it to a new place while still enjoying low payments.

If you think rates are going down, choose a shorter term or get a mortgage that is convertible like most variable-rate mortgages. The ability to lock in protects you in case rates start going up.

Back to Top

Amortization Periods

Amortization is the number of years required to completely pay off the mortgage based on a scheduled payments of the principal. The longer the amortization, the lower the monthly payment but the more interest one pays over the life of the mortgage. Extended amortizations are actually slowly taking the place of interest-only mortgages in decreasing monthly payments. It is available up to 35 years with most prime lenders, and 40 years with non-conventional or subprime lenders.

The longer the amortization period the bigger the mortgage amount one can qualify for to buy a more expensive property. However, unless borrowers want to qualify for more money, it is not recommended to get longer amortization periods for them to buy their dream homes which they plan on living in for so many years, as they will incur more interest payments in the long run. However, for those who do not plan to pay off their mortgages (e.g. on some rental properties), it is a good option to get a longer amortization. Choose careful how long you want it for as you consider your plans and long-term goals. To decrease it is far easier. Increasing it after title registration will usually require legal services and costs.

Back to Top

Payment Frequencies

The right payment frequency for your needs can save you thousands of dollars and help pay off your mortgage sooner.Mortgage payments can typically be made weekly, accelerated weekly, bi-weekly/semi-monthly, accelerated bi-weekly, or monthly. The more significant difference lies in accelerated payments. With accelerated payments, you make payments every two weeks for bi-weekly and every week for weekly schedule. This means you pay an extra month of mortgage payment every year thereby reducing your amortization period and saving you money in interest rates. The non-accelerated payments just spreads out your payments more if you are using semi-monthly/bi-weekly or weekly, and saves very little money in interest. To calculate how much you can save, you may also use our (Accelerated) Bi-Weekly VS Monthly Mortgage Calculator.

Some things to consider when choosing which payment schedule to use are:

  1. If you are salaried, when do you get paid? If you get paid on the 15th and the 30th, choosing a non-accelerated semi-monthly/bi-weekly payment might be a good idea.
  2. If you are self-employed or commissioned and you do not get the same income every week, a monthly payment may be more suitable. (Granted you may at times have significantly more income than normal, you may want to use your prepayment privileges to shorten the amortization period on your mortgage.)
  3. Do you want to pay off your home sooner? Then choose an accelerated option if you can afford to make the payments that way. You will not only shorten your amortization period, but you will also save money on interest rates.
  4. Whatever payment schedule you use, you can always pay off your mortgage faster and save on interest payments by making extra principal payment allowable each time you pay or taking advantage of pre-payment privileges you have.
Payment Rate Payment Amount Years to Pay Off Mortgage Estimated Interest Paid over the Mortgage's Lifetime
Monthly $639.87 25 years $91,940.85
Bi-Weekly $319.90 21 years $74,927.96

This example is based on a $100,000 mortgage with a 6% interest rate calculated semi-annually, not in advance, and assumes that the interest rate remains constant for the full 25-year amortization period. There is very little difference between weekly and bi-weekly payments. Bi-weekly payments are generally less stressful than weekly payments if you have other payment obligations to make throughout the month.

Great TIP:There a very few times when lenders will allow borrowers to double-up on their payments. The extra amount goes towards reducing the principal. If you are paying monthly, doubling up once a year achieves the benefits of paying weekly or bi-weekly. This is great for those who opt for monthly payments but want the benefits of bi-weekly or weekly payments. Doing so may also get lenders to let you skip an extra payment in the future if you have doubled up payments in the past.

There are also other ways you can save more on interests payments for your mortgage and pay it faster. For more information, read our article on Paying Off Your Mortgage Faster.

Back to Top

Pre-payment

One of the ways to pay off your mortgage faster is to have pre-payment priviledges included in your mortgage contract. Prepayments are extra payments to reduce your principal - thereby saving you interest payments over the life of your mortgage. This could mean thousands of dollars saved in the long run and a significant reduction in your mortgage's amortization period.

Prepayment privileges usually vary from one lender to another. Some may let you make a lumpsum payment of up to ten percent of your principal, once a year on your mortgage's anniversary date. Others may let you pay down as high as twenty percent of your principal (per year), and/or prepayments may be allowed throughout the year provided the total payment in one year will not exceed twenty percent. Making prepayments as often as possible is highly recommended over making a big lumpsum paynent, if your contract allows for it. To calculate how much you can save by taking advantage of your prepayment privileges, you may use our Mortgage Prepayment Calculator.

Important Tip: Should you decide to renew or refinance a mortgage, making the allowable prepayment amount may also help reduce the penalty you might have to pay.

Back to Top

Early Renewal Options

The option to renew early without penalty is great especially if your mortgage is coming up for renewal and the rates are increasing. This option allows you to lock-in the lower rates early without waiting for your mortgage to mature and having to accept a higher rate if the rate actually increases.

Back to Top

Pre-Payment Penalties

Pre-payment penalties usually apply to closed mortgages if they are paid off before maturity. The penalty is usually the greater of three-months interest or Interest Rate Differential. For more information on how these penalties are calculated, read our FAQ (Frequently Asked Questions) article on
"Breaking" a Closed Mortgage and Paying the penalties.

Back to Top

Assumable Mortgages

Assumability allows the buyer of your home to take over (or assume) your mortgage. It makes the deal attractive to the buyer if the interest rates at the time you sell are higher than the when you bought your house. In this case, because the mortgage that can be assumed has a lower rate, it adds to the selling "feature" for your home. This works only if you are moving but will not take your mortgage to your new place, or if you are selling but not purchasing another home. Moreover, if there is a penalty involved, instead of ending your mortgage term, the buyer can take over, provided he/she meets the lender's qualifiying criteria.

Note: If you let a buyer assume your mortgage, make sure you get a release document from the lender to ensure that you are no longer liable for any payment default or breach of mortgage contract.

Back to Top

Portability

Portability is a mortgage option that enables borrowers to take their mortgage with them to another property, within a certain allowable period of time, without penalty. A transfer fee may apply.

If you want to take your mortgage with you when you move, you can if your mortgage has a clause that allows you to do that. This option allows you to continue your savings on your lower rate if the going rates are higher, as well as avoid any penalties if you were to break that mortgage. If you need a larger mortgage for the new property, your existing mortgage amount may be increased provided you qualify and get approved for the new increased amount. As for the associated costs, since a new mortgage document must be registered on title, legal fees and normal appraisal fees will still be applicable.

Back to Top

Expandability

Expandability lets you increase the amount of your mortgage at the same interest rate. If you are able to get the same amount out of your equity, it will be better to increase your mortgage amount with this option instead of getting a second mortgage which will most likely have a higher rate.

Back to Top

Interest-Only Home Equity Lines of Credit (HELOC)

Some mortgage lenders may allow you to get a Home Equity Line of Credit (HELOC )instead of a mortgage. Some may do a combination whereby the principal you pay down on your mortgage gets added to the HELOC you can access to finance home improvements, pay high-interest debts or buy investments, etc. Payments may be made on interests only which can be at a rate as low as prime. You may purchase high-return investments and make the interest payments on the portion of the line of credit used to buy it tax deductible. (To obtain more information about making your interest payments tax-deductible, please speak to a licenced accountant or financial planner.)

In order to access your available credit, you only need to simply write a cheque, or use the credit and/or debit card the lender issues you. You are not required to withdraw the money until you need to and you make interest-only payments on the amount you have withdrawn. Moreover, you may pay off your balance or a portion of it at any time, without penalty. As soon as you pay down a portion of the principal, you reduce your interest payments and you make the amount you put in available again for future use.

Back to Top


Apply for a mortgage Get pre-approved for a mortgage Refinance your mortgage Renew a mortgage