Mortgage Basics

By Sherri Platt

Perhaps even more stressful than finding the perfect home is finding the perfect mortgage. It may seem like every bank, broker and builder is selling a different product at a different rate.

The first decision most people make is to choose between a mortgage with a fixed rate or a variable rate. The difference is pretty straightforward: with a fixed rate the interest rate remains fixed, or locked in, and with a variable rate the interest rate will fluctuate throughout the term of your mortgage, according to the prevailing market rates. Generally a variable rate mortgage in a time of low interest rates will mean that less money is paid out over the course of the term. However, there is always the worry of rates rising.

Mary Stergiadis, senior business development officer with the Canada Mortgage and Housing Corporation (CMHC), says that nervousness about rising rates leads many first time home buyers to opt for a fixed rate mortgage. A repeat buyer, she adds, who is more confident may be more inclined to choose a variable rate mortgage.

For the faint of heart some variable rate mortgages offer capped or protected rates, meaning a maximum rate of interest is set for the buyer. Even if rates rise, they will never exceed the set point. Finding your own comfort level is important when faced with the prospect of fluctuating rates. For some the potential savings are not worth the worry over rising rates.

The length of time in which the conditions of your mortgage will stay the same, known as the term, will vary depending on what type of mortgage you choose. A shortterm mortgage is usually for under three years with more than that considered long-term. There is generally a higher interest rate attached to long-term mortgages, a trade-off for having several years at a stable rate, which may be a plus when interest rates are rising. If interest rates are falling a short-term mortgage may be the better option - allowing you to lock in at an interest rate when you think rates won't continue to fall.

No matter the interest rate, how you pay down your mortgage will also influence what you pay in total. Paying weekly or biweekly, instead or monthly, will lower the total amount of interest paid and save you money. Choosing a shorter amortization period - the number of years it takes to pay off the loan - will also save you interest payments.

Though it sounds obvious, it's best to customize your mortgage according to your needs, and to consider features beyond the interest rate when choosing a mortgage. "Over time more consumers have become more sophisticated and more knowledgeable, and open to new options," says Stergiadis.

For example, if you think you will not stay at your new home long then you may want to look for a mortgage with portability. You will then be able to move your mortgage with you at the same terms. Another option, if you think that you may be moving in the foreseeable future, is to consider an open mortgage. While they generally have a higher interest rate, they give you the flexibility to make lump sum payments before the end of the term without penalty.

If downsizing is on your horizon, you may want to look for a mortgage with assumability. An assumable mortgage is one that can be picked up at the same terms by a prospective buyer. Or, you may want to consider a mortgage that allows you to use the equity in your home as a line of credit. While the mortgage must still be paid off by the end of the amortization period it leaves credit available to you as you pay down the mortgage.

As you can see, you have many different mortgage options. No matter what type of mortgage you choose, just make sure that the dollars and cents make sense for you.

Mortgage Glossary

Amortization Period: The number of years it takes the borrower to pay off their loan in regular payments of principal and interest.

Assumable Mortgage: New owners of a property can take over the existing mortgage of that property, at the same terms.

Down Payment: The difference between the purchase price and the mortgage amount as a result of money paid.

Fixed Rate: The interest rate remains fixed, or locked in, for the term of the mortgage.

Mortgagee: The lender who holds the mortgage.

Prepayment: Paying extra payments or a lump sum to pay down your mortgage faster.

Prepayment Penalty: Money charged for extra payments or lump sum payments on the mortgage. A prepayment clause in your mortgage agreement allows you to make extra payments without incurring a penalty.

Portable Mortgage: A mortgage that allows you to transfer the amount and terms over to a new property without cost or penalty.

Variable Rate Mortgage: The interest rate may vary during the term of the mortgage, according to the prevailing market rates. Some variable rate mortgages offer capped or protected rates, meaning a maximum rate of interest is set for the buyer.

Paying the least amount of interest possible on your mortgage means that your new home or condo costs less in the long run - no matter what type of mortgage you decide on. Here?s how to pay less interest:

Increase your down payment. The larger the down payment you put down the smaller your mortgage, which means less interest.

Frequent payments. Paying down your mortgage in a weekly or biweekly payment schedule will mean you pay less interest than if you made monthly mortgage payments.

Shorter amortization period. The longer your repayment period the more you will be paying in interest. You can save money by paying your mortgage off in less time.