What do you know about mortgages? You’re likely aware that they’re not all the same. It’s helpful to understand how these financial vehicles differ from one another so that you can find a type that’s the best fit for you and your family.
The Canadian government has some excellent in-depth information. With that in mind, let’s start with the following basics. Here’s what you need to know about mortgage options.
Variable or fixed interest rate
When you take out a mortgage, you’ll negotiate an interest rate. This fee that you pay to the lender is added to the amount you borrow. Interest rates change over time.
Mortgages are approved for a set number of years, generally from one to five years. This is called your mortgage term. When you sign on for a term, you’ll choose a variable or fixed interest rate.
A variable rate means that your mortgage payments will change as interest rates are adjusted while a fixed rate locks in the same rate for the duration of the term.
Usually, a fixed interest rate will be higher than a variable one but this type of mortgage can offer some peace of mind that your payments will remain consistent. Keep in mind that when your mortgage term comes to an end, the negotiation process starts again.
A hybrid mortgage combines both a fixed and variable interest rate. In other words, a portion of your loan has a fixed rate while the remaining funds are borrowed at a variable rate.
This is a less popular type of mortgage among home owners and isn’t available at all financial institutions. However, it’s worth considering in case it might be right for your circumstances.
Open and closed
Whether your mortgage is open or closed refers mainly to your additional payment options. With an open mortgage you’re allowed to make extra payments on your loan. The benefit is that the additional funds will go towards the principal amount you borrowed and save you some interest charges in the long run.
If a mortgage has a closed term, then you’re limited in how much extra money you can put towards your loan during the year. You may not be able to make any extra payments at all. If your contract has what’s referred to as a “prepayment privilege”, it will specify the maximum amount of cash you can apply to your loan. One thing to consider is that closed mortgages typically come with a lower interest rate than open contracts.
There are other characteristics of mortgages to be mindful about. These include the amortization period, payment frequency and if a mortgage is portable or assumable. Learning as much as you can is invaluable when it comes to selecting the mortgage that meets your needs.
If you’re in the market to purchase a new property, I can certainly help you with your home search plus I can also suggest several reputable mortgage lenders. Reach out to me without hesitation or obligation to find out how I can assist.