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Choosing the right mortgage

Whether you are a first-time or experienced home buyer, choosing the mortgage with the right combination of features is equally important.

This section will help you understand the differences between a variety of mortgage options. As you will see, each type of mortgage has slightly different features which appeal to a variety of different preferences.

For example, some home buyers take comfort in knowing that interest rate will be the same throughout the entire term of their mortgage. They can also take comfort in knowing what their principal amount will be at the end of the term. Other home buyers may be willing to accept some fluctuation in their interest rate in exchange for the potential long-term savings or the change to pay off their mortgage faster.

The right mortgage for you is the one that best matches your overall comfort level and fits with your income and lifestyle.

Conventional or high-ratio

A conventional mortgage is a loan for no more than 80% of the appraised value or purchase price of the property, whichever is less. The remaining amount required for a purchase (20%) comes from your resources and is referred to as the down payment. If you have to borrow more than 80% of the money you need, you’ll be applying for what is called a high-ratio mortgage.

Here’s how a high-ratio mortgage works:

You are required to have minimum 5% down payment when you buy a home. Any purchase where the down payment is less than 20% is considered a high-ratio mortgage, and the mortgage must be insured by the Canada Mortgage and Housing Corporation (CMHC) or Genworth Financial Canada (Genworth). The insurer will charge a fee for this insurance. The amount of the fee will depend on the amount you are borrowing and the percentage of your own down payment. Typical fees range from 1.00% to 3.00% of the principal amount of your mortgage. Some cases will go up to 7% of the principal amount. This amount can be paid up front or added to the principal portion of your mortgage.

Fixed rate or variable rate

When you take out a fixed-rate mortgage, your interest rate will not change throughout the entire term of your mortgage. As a result, you’ll always know exactly how much your payments will be and how much of your mortgage will be paid off at the end of your term.

With a variable-rate mortgage, your rate will be set in relation to TD Prime1 at the beginning of each month. In other words, it may vary from month to month. Historically, variable-rate mortgages have tended to cost less than fixed-rate mortgages when interest rates are fairly stable.

When rates change, your payment amount remains the same. However, the amount that is applied toward interest and principal will change. If interest rates drop, more of your mortgage payment is applied to the principal balance owing. This can help you pay off your mortgage faster.

Short term or long term

The term is the length of the current mortgage agreement. A mortgage typically has a term of six months to 10 years. Usually, the shorter the term, the lower the interest rate.

A short-term mortgage is usually for two years or less. A long-term mortgage is generally for three years or more. Short-term mortgages are appropriate for buyers who believe interest rates will drop at renewal time. Long-term mortgages are suitable when current rates are reasonable and borrowers want the security of budgeting for the future. The key to choosing between short and long terms is to feel comfortable with your mortgage payments. After a term expires, the balance of the principal owing on the mortgage can be repaid, or a new mortgage agreement can be established at the then-current interest rates.

Open or Closed

Open mortgages can be paid off at any time without penalty and are usually negotiated for very short terms.2 They are suited to homeowners who are planning to sell in the near future or those who want the flexibility to make large, lump-sum payments before maturity.

Closed mortgages are commitments for specific terms. If you want to pay off the mortgage balance, you will need to wait until the maturity date or pay a penalty.

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