Mortgage Basics

A mortgage is a loan specifically designed for purchasing real estate, where the property itself serves as collateral. Understanding mortgage basics is crucial for anyone looking to buy a home. There are various types of mortgages, each with unique features, including fixed-rate or variable-rate mortgages. Additionally, mortgages can be categorized as insured or uninsured, depending on the down payment size. Knowing these fundamentals will help you make informed decisions as we navigate the mortgage process together. Here’s some info about these basic mortgage types.

Insured Mortgages:

What It Is: An insured mortgage is one where the lender protects themselves against default by requiring mortgage insurance. It is to protect the lender, NOT YOU, this is a common misconception.
Who It’s For: For borrowers with a down payment of less than 20%.
Benefits: Allows you to buy a home with a smaller down payment. It can also help you qualify for a mortgage if you might not otherwise meet the lender's criteria.
Cost: You’ll pay a premium for the mortgage insurance, which can be added to your monthly payments.

Uninsured Mortgages:

What It Is: An uninsured mortgage does not require mortgage insurance because the borrower has a larger down payment (usually 20% or more).
Who It’s For: Generally for borrowers who can afford a substantial down payment.
Benefits: Lower overall costs, as you won’t pay mortgage insurance. This can result in lower monthly payments and less interest over the life of the loan.
Cost: While you won’t pay mortgage insurance, you may face stricter eligibility criteria and higher interest rates.

1. Fixed-Rate Mortgage

Definition: A fixed-rate mortgage has an interest rate that remains constant throughout the life of the loan. These mortgages ARE NOT linked to Bank of Canada rate fluctuations as they are tied to Canadian bond rates.
Duration: Typically offered in terms of 15, 20, or 30 years.
Pros:
- Predictability: Monthly payments remain the same, making it easier to budget.
- Stability: Protects from interest rate fluctuations.

2. Variable-Rate Mortgage

Definition: A variable-rate mortgage has an interest rate that can change periodically based on market conditions. With some lenders your payments change and with others the payment will stay the same, with only the interest/principle amounts changing. This the one affected by Bank of Canada announcements and is tied to prime interest rate and overnight lending rate.
Pros:
- Potential for lower long-term costs if interest rates remain stable or decrease.
- Ability to lock rates in at any point in your term to create fixed term mortgage
Cons:
- Uncertainty: Monthly payments can increase significantly if interest rates rise.
- Budgeting can be more challenging due to fluctuating payments.

Considerations When Choosing

Risk Tolerance: Fixed-rate mortgages are more stable, while variable-rate mortgages carry more risk due to potential interest rate increases.
Time Horizon: If you plan to stay in your home for a long time, a fixed-rate mortgage may be more beneficial. Conversely, if you plan to move in a few years, a variable might save you money.
Market Conditions: Consider current interest rates and economic forecasts. If rates are low, locking in a fixed rate could be advantageous.

Conclusion

Each mortgage type has its own advantages and disadvantages, depending on your financial goals and risk tolerance. As a mortgage broker, I can help you navigate these options effectively. With my expertise, you can simplify the mortgage process and make an informed decision that aligns with your financial situation. Let’s work together to find the right mortgage solution for you.

Interested in what potential mortgage payments could look like? Follow this link below for quick access to possible mortgage options for you.

Mortgage Calculator