Mortgage Mania

Whether you're buying a new or resale home, make

sure you explore a number of mortgage options

before choosing the one that's right for you.

First, you will need to decide between an open or closed

mortgage. An open mortgage allows you to repay the loan

in part or full at any time without a penalty. A closed

mortgage, on the other hand, keeps payments unchanged

for the duration of the loan.

Because of their greater flexibility, interest rates on open

mortgages are usually higher, but they're a good choice if

you plan to sell your home in the near future. Closed

mortgages tend to offer lower rates, but generally come with penalties or restrictive

conditions attached to

lump sum payments.

Still, they're worthwhile

if you want to have a

fixed payment to work

your budget around for

a few years. Plus, many

mortgage offerings will

also allow you to convert

from an open to a closed

mortgage at any time.

Regardless of the mortgage you choose, you will have to

consider a number of additional options, including the interest

rate, term, amortization period, and payment schedule.

The rate of interest on a mortgage can be either fixed or

variable. Fixed rates are locked in for the full term of the

mortgage, while variable rates fluctuate on a monthly basis

based on the prevailing market rates. With a variable rate

mortgage, your monthly payments remain the same for the

term of the loan, but the percentage that goes towards

paying off the principal and interest increases or decreases in

response to the market rate.

A variable rate can be a good choice if rates are high when

you arrange your mortgage and then fall afterward, but if

rates rise, you may want to convert to a fixed rate. Some

lenders also offer a protected or capped variable rate, which

ensures your interest rate won't rise above a predetermined

limit. Bear in mind, however, that converting from a variable

to a fixed rate may incur a cash penalty, and that capped

variable rates usually come at a premium.

The term of a mortgage is the length of time for which

the interest rate and other factors you negotiate will remain

in place. Terms usually last anywhere from six months to 10

years, and at the end of the term you either pay off your

mortgage or renew it, possibly renegotiating its terms and

conditions. Generally speaking, the longer the term you

select, the higher the rate of interest you will pay.

The amortization period refers to the amount of time

over which the entire debt of your mortgage, including the

principal and interest, will be repaid. Most mortgages

are amortized over 15-, 20-, or 25-year periods. A longer

amortization means that your monthly payments will be

lower, but because you are effectively borrowing the money

for a longer period of time, you will also pay more interest in

the long run.

In terms of the payment schedule, most mortgage loans

are repaid on either a monthly, biweekly, or weekly basis.

More frequent payment schedules increase the total amount

paid towards your mortgage principal each year, lowering

the overall interest you pay and potentially taking years off

the life of your mortgage.

Another relatively recent option is an insured

homeowner line of credit. CMHC was the first to offer

mortgage loan insurance to help homebuyers obtain a

secured homeowner line of credit of up to 90 per cent of the

value of their principal residence. With a secured line of

credit, you can draw funds up to your insured credit limit at

any time without the need to re-apply, and you can also pay

as little as the monthly interest charges for a

limited period of time. Please contact your lender to confirm

availability and qualifying criteria.

There are still many further mortgage options to

consider. So before you make any final decisions, talk to your

lender, do your research, and make sure all your questions

are answered to your satisfaction.

For more information or to order your free copy of

CMHC's Homebuying Step By Step consumer guide and

workbook, please visit our website at www.cmhc.ca or call

toll-free at 1-800-668-2642.

Mark Salerno is the GTA district manager at the Canada

Mortgage and Housing Corporation. For over 60 years,

CMHC has been Canada's national housing agency and a

source of objective, reliable housing expertise.