The mortgage options today can be overwhelming. My approach is to educate my clients as much as possible so that the final mortgage product fits with their financial lifestyle perfectly.
|· Insured vs. Insurable vs. Non-Insurable||How each definition can change the cost of your mortgage.|
|· Fixed Rate vs. Variable Rate||Understanding how your payment changes.|
|· Term vs. Amortization||Two terms used to describe the time associated with your mortgage loan.|
Each option will have a profound impact on your mortgage payment and therefore the cash flow of your home. As your mortgage broker, I have your long-term best interests in mind at all stages of the approval.
There are a lot words and phrases associated with mortgage lending. Having a general overview of mortgage terms will help you make an informed decision regarding one the largest purchases in your life!
Insured vs. Insurable vs. Non-Insurable
All home purchases with less than 20% down payment must purchase mortgage default insurance.
The absolute best rates are for mortgages that are insured by one of the 3 Canadian mortgage default insurance companies: CMHC, Genworth or Canada Guarantee. You pay for the mortgage default insurance upfront. The lender benefits since they have little or no risk for their money, since the mortgage is insured. Your mortgage payment and insurance payment are combined into one larger payment.
The mortgage is “stress tested” at a higher amount than the borrower would be paying to ensure borrowers can afford their mortgage if the rates raise.
Lenders may choose to pay for mortgage default insurance on mortgages where the borrower has more than 20% down payment. This insurance protects the lenders from a loss. In the mortgage industry, we call this back-end insuring.
Uninsurable Mortgages include:
- Refinancing (you want to pull some of the equity out of your property)
- Mortgage on rental properties
- Mortgages approved at 30 years amortization
- Properties worth over a $1 million
The Government is intentionally passing on the risk to Lenders by implementing stricter insurance qualifying guidelines and limiting mortgages that can be insured to what they consider lower risk.
The responsibility is now on the lender to absorb more costs if a borrower defaults. The end result is no surprise… lenders pass the additional costs on to borrowers.
Fixed Rate vs. Variable Rate
The difference between variable rate mortgage and fixed rate mortgage products has become less in recent years. Fixed rate mortgages offer consistency in a monthly payment but come at a slightly higher price. Variable rate mortgages remain low, but are the riskier of the two mortgage choices – so how do you choose a fixed or variable mortgage?
I can help you decide by analyzing your income, lifestyle and risk tolerance and determine which mortgage product best suits your circumstances.
Understanding the risk involved with variable rate mortgages is a prerequisite
The benefit of variable rate mortgages, also called adjustable rate mortgages, is that the interest rate is typically lower than that of fixed rate mortgage products. However, the main drawback is the risk involved. Without warning, interest rates could increase or decrease and thus changing your monthly payments.
The first thing you should assess is your current income, earnings and potential for increase of earnings. This is the quickest way to determine, should your interest go up, how much of an impact would it have on you and your lifestyle.If you can comfortably afford mortgage interest rates that are two per cent higher than what you’d pay on your variable rate, then you are in a position that a variable rate makes sense.
When we have done the research and concluded that you can afford a variable rate mortgage, the next thing you will want to determine is if a variable rate mortgage fits your personality and lifestyle. This is also important if you have a spouse that might not feel the same way you do. If you’re the type of person who can’t sleep at night knowing your interest rate may go up, even slightly, a variable rate mortgage may not be the best option for you.
Term vs. Amortization
There is only one major difference between a mortgage term and an amortization period; the time within which they are completed.
A mortgage term refers to the period within which you’ll be mortgaging a house or property through a single lender, paying the specific rate you have agreed upon. A typical mortgage term in Canada can be anywhere from 6 months to 10 years. During that time, you’ll need to make your designated mortgage payments to avoid defaulting.
Strictly speaking, shorter mortgage terms will result in a better rate than longer ones, but again, this depends on your lender. Once your mortgage term is up, you can choose to apply for a renewal contract with the same lender, and deal with whatever changes to your rate and conditions they should put in place, while paying the remaining principal on the house. If you aren’t satisfied with your current conditions or your lender denies your renewal for any reason, your mortgage term will be over and you can move on to another lender.
The mortgage amortization period refers to the length of the overall mortgage, the amount of time it takes you to pay off the full cost of the home. As you go through the years, making mortgage payments, you’ll slowly be amortizing the property. A normal Canadian amortization period depends on the size of the down payment you made and whether or not you had to purchase default mortgage insurance, but it typically a mortgage takes anywhere from 20 to 35 years to pay off.
I’m always happy to schedule an in-person meeting or phone call if you have any questions or concerns regarding your Surrey Mortgage.