Mortgage 101 – a quick primer

There’s a lot to think about when you’re considering a mortgage: your down payment, what type of mortgage, how long you have to pay it off, how much in monthly payments you can afford, mortgage interest rate.

Knowing the mortgage lingo will help you better understand the financial aspects of buying a home.

Amortization:

This is the amount of time it takes to pay off a mortgage with interest on a home. Generally, this is between 5 and 30 years, but if you want to pay down your mortgage more quickly, you can shorten the amortization period and make higher mortgage payments.

Term:

This is the length of the mortgage contract with your lender. Typically, mortgage terms are between 4-5 years, although they can be shorter or longer. When the term ends, you can either pay off the mortgage or renew the mortgage contract with your lender.

Most common types of mortgages:

Open mortgage: Are you self-employed with a variable income? You may benefit from the flexibility of being able to pay your mortgage off more quickly by increasing your monthly payments or making a lump sum payment without penalties. However, you’ll pay a higher rate of interest than a closed mortgage in exchange for this flexibility.

Closed mortgage: Because they offer a lower rate of interest, closed mortgages are the most common financing option. However, if you want to increase your regular repayments or make a lump sum payment, you’ll incur significant penalties.

Reverse mortgage: Intended for homeowners aged 55 years or older, a reverse mortgage allows you to borrow up to 55 per cent of the current value of your principal residence, while retaining ownership.

Interest rate considerations:

Fixed rate mortgage: Your interest rate and payment stay fixed over the term of the mortgage. Because interest stays the same, you know exactly when your mortgage will be fully paid off and how much you’ll pay each month. The initial interest rate is often higher than a variable interest rate, and you’re locked in for the term of the mortgage.

Variable rate mortgage: Your interest rate will fluctuate depending on your lender’s prime lending rate. If the prime rate falls, your interest rate may as well, meaning more of your payments will go towards paying the principle. Conversely, if the prime rate increases, less of your payment will go towards the principle, lengthening the amortization period.

Hybrid: This type of mortgage arrangement allows a borrower to split their mortgage between fixed and variable components, with the most common percentage between 50-50.

Planning to buy a home?

Buying a home is likely one of the biggest financial decisions you’ll ever make. But it’s also an emotional process as you face a major life transition. Searching for the perfect home is both an exciting and stressful time. Use our checklist to ensure you’ve covered off all the practical and emotional decisions.