Purchasing a home is one of the biggest investments you'll make. Aside from searching for the right property, there is also the task of securing the right mortgage! As with most things in real estate, there is a lot to consider when it comes to choosing a mortgage. Fixed? Variable? Amortization Period? Open? Closed? Portable?... What?!
Your mortgage broker or advisor is there to answer your questions, give suggestions and help you understand what mortgages are available. In this post we go over 5 important questions to ask yourself and discuss with your broker or advisor before securing your mortgage.
5 things to ask yourself before Choosing a mortgage:
1.) Is this your dream home, or a stepping stone property?
What is the goal for the property you are hoping to purchase? This is a main consideration for the type of mortgage you choose.
If you plan to stay in the home for many years to come, you may look at stable, fixed rate mortgage options. This type of loan will require monthly payments that remain the same throughout the life of the loan and will not change if rates increase or decrease. However, If you plan on moving within a few years, a fixed rate mortgage may have costly penalties to break your term early.
If the property is a stepping stone investment on the way to your dream home (that you may only live in for a couple of years) you would likely do better searching for a variable rate mortgage that gives you the freedom to sell when the time is right for you, without high penalties.
2.) How much do you have available for a downpayment?
It’s important to understand what you can afford before you start searching for properties. How much downpayment you have available will play into factors like how long your amortization period can be, whether or not you need mortgage insurance, and generally how much your mortgage will cost. You are required to buy mortgage loan insurance if your down payments less than 20% of the purchase price
You should also take into account other costs such as interest rates, taxes, home insurance, maintenance fees, and utilities. Use my easy Mortgage & Finance Calculators to get an overview.
"How much downpayment you have available will play into factors like how long your amortization period can be, whether or not you need mortgage insurance, and generally how much your mortgage will cost. "
3.) Are you self-employed or commission-based?
If you are self-employed or gain income from commissions it may be difficult to get approval from a bank. In these cases a mortgage broker will likely be your best asset because they have access to a wider variety of lending options.
The options available to you may be more limited than someone with a traditional source of income but in most cases, if you can provide proof of income, a broker can find a lender that will accommodate your situation.
4.) How much risk are you comfortable with?
Does rate fluctuation make you nervous? Or do you get excited at the thought of potentially saving over time by taking a chance? The level of risk you are comfortable with will help decide which type of interest rate better suits you.
Fixed rates offer stability and predictability. They also provide protection against rising
interest rates. However, there are risks associated with fixed rate mortgages. If interest rates fall, you could end up paying more money in the long run. Also if you plan to move or payout your mortgage before your current term is up your likely to see a high pre-payment penalty.
Variable rates are less predictable, but historically have shown to cost less overtime. If you
are okay with the possibility of rate changes that potentially save you money, a variable rate
might be a better choice.
Visit the Canada's resource on types of interest on mortgages.
5.) How quickly are you hoping to pay off your mortgage?
Mortgages have different rules when it comes to the frequency and duration of your pay
back schedule. Certain mortgages allow you more flexibility to pay off your mortgage ahead
of schedule without penalties, saving you on interest costs over time. Others do not allow
The conversation should be about how frequently you'd like payments to be made, whether or not you'd like to put extra money towards your mortgage from time to time, or if you plan to sell the home in the near future. You can learn more about open and closed mortgages in Canada.