At Champion Mortgage, we know that there are a lot of considerations when choosing a mortgage. We want our customers to understand their options in order to make the best decisions possible. In this blog, we aim to clarify some often misunderstood elements of mortgages so that you can make better, more informed decisions.
Types of mortgages
Our customers often ask us, “What is the best mortgage to get?” The answer is: there is no one “best” mortgage, as it depends on a multitude of factors and your unique situation. There are many types of mortgages on the market worth noting, and these include:
A conventional mortgage is when a buyer provides a minimum 20% down payment. This means that they will be eligible for a mortgage that is no greater than 80% of the appraised value or price of the home.
Pro: Providing a 20% down payment generally allows the buyer a broad choice of mortgage options and rates, sometimes with increased flexibility, depending on the lender.
Con: Having a minimum 20% down payment is difficult for most home buyers, especially first-time home buyers.
EXPERT TIP: If you have a 5% to 19% down payment, your mortgage will be insured with CMHC, Genworth, or Canada Guaranty. Most people don’t realize it but the insurance premium is added to your mortgage so you don’t have to pay it with your current savings.
An open mortgage allows the buyer to repay the mortgage, in full, at any point in time, without penalties.
Pro: There are no penalties to repaying your mortgage before the end of the mortgage term.
Con: Open fixed mortgages are generally only available in shorter terms of six months or one year, and open variable mortgages generally have higher interest rates.
EXPERT TIP: Open mortgages come in many formats but are really only suited for people in the right situation. Prior to selecting an open mortgage you should really speak to Champion Mortgage.
Variable rate mortgage
A variable rate mortgage is exactly what it sounds like: a mortgage that has an interest rate that reflects the rate changes in the market.
Pro: If interest rates are low, more of your money goes towards your principal.
Cons: When interest rates are high or begin to increase, more of your money will go towards paying interest rather than principal. Market variability may also impact the timing around when your mortgage will be repaid.
EXPERT TIP: Champion Mortgage monitors prime rate changes and provides our clients with rate forecasts from our senior strategy team — you’re not left in the dark; we work with you to ensure your mortgage remains affordable.
A closed mortgage allows the buyer to lock in a fixed interest rate for a longer period of time.
Pro: Locking in lower rates for a long time can offer peace of mind.
Con: If rates decrease, you will be locked into paying your originally agreed upon interest rate or face prepayment charges to renegotiate your terms.
EXPERT TIP: Champion Mortgage has lenders with such low mortgage penalties that if fixed rates drop we can often move you into a lower fixed rate even mid-way through your term. We monitor this for you on your behalf so you don’t miss out on interest saving opportunities.
A convertible mortgage offers the ability to switch from a variable rate to a fixed rate.
Pro: This may help to provide you with more control over your rate.
Con: If you change your terms then you will be subject to conversion fees.
EXPERT TIP: All variable rate mortgages at Champion Mortgage are Convertible into a fixed rate.
Is it worth it to get a mortgage that allows me prepayment options?
There are a variety of prepayment options that are offered by the Canadian mortgage lenders. Often, lenders suggest that securing a mortgage with the flexibility to prepay is advantageous, but this may come at a price. Some mortgages will include the ability to prepay but not offer as low an interest rate, or as long a term, or may include additional terms and clauses that are not always desirable.
Prepaying your mortgage means paying more than is required in your terms in order to repay your mortgage sooner. This prepayment could be made in a lump payment or by adding more funds to each payment.
Whatever your situation, if you are able, prepaying your mortgage will reduce your total interest paid and will increase your home equity — but there is a bigger picture to be considered and additional questions that you should ask before prepaying.
- Do you have savings for an emergency?
It isn’t fun to think about, but it’s important to be realistic and consider the unexpected. What if your car suddenly quits on you? What if a medical issue arises and you aren’t able to work? Will you have enough money available to cope with these situations if you have contributed more than required to your mortgage?
- What kind of retirement plan are you planning for?
Whether you have a group RRSP through your work or you are using personal savings, you may want to consider having funds available to invest in your retirement, rather than your home.
- Are you living in your forever home, or your starter home?
If you plan on moving again in the future, then you may wish to have money available for a down payment on your new home.
Industry Fact: Only 7% of homeowners take advantage of prepayments with a lump sum.
The team at Champion recommends examining every feature offered with a mortgage including flexible payment options, penalty calculations, and other fine print that could limit your ability to adapt to a changing mortgage rate environment.
Being informed is half the battle and we are here to help. Contact our expert Champion Mortgage team for all your mortgage questions — we’re happy to help