The best mortgages have low interest rates, flexibility and the most amount of options. Compare mortgage rates and deals with Andrew Thake. Find the best fixed, variable and unadvertised mortgage rate specials here. Explore this mortgage guide to learn how mortgages work and how much down payment you need.
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In this mortgage guide:
- What is a mortgage?
- How does a mortgage work?
- What is a mortgage rate?
- Types of mortgages
- What you need to get a mortgage
- How to compare mortgages and find the best one
- Is refinancing the same as getting a mortgage
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What is a mortgage?
A mortgage is a loan that is secured against real estate. Most people require this loan in order to buy a property.
You save up a down payment and a mortgage lender will lend you the rest of the funds. This loan is paid back with interest over a period of time. This period of time is called an amortization. Within this amortization there are terms such as a five year fixed term. The average starting amortization in Canada is 25 years and a five year mortgage is one of the most popular options.
Learn more: 5 year fixed rate mortgages
In Canada the minimum down payment is typically 5% of the purchase price. However there are options available currently where you can purchase a home with no down payment saved.
The amount of loan that you borrow in relation to the value of the property is called a loan to value or LTV. In the past those with larger down payment could achieve more favourable interest rates however currently those with an insured mortgage have access to the best interest rates.
Learn more: High ratio, conventional, insured, insurable and uninsurable
Learn more: Best mortgage rates Ottawa Ontario
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How does a mortgage work?
A mortgage is a loan that is used to purchase a property. The loan is secured with the property. If you do not fulfil your mortgage payment responsibilities, the lender may look to foreclose on the property.￼
When you buy a home, the sellers are paid your down payment plus the mortgage funds. The sellers are paid through your solicitor. From there, you pay the regular mortgage payments either monthly, biweekly, weekly and more.
A mortgage amortization is agreed upon when you set up the mortgage and is usually up to 25 or 30 years depending on your down payment. With alternative lenders however you may be able to do an amortization up to 40 years.
The amount of your regular mortgage payment is determined by the mortgage amortization and the mortgage rate.
What is a mortgage rate?
A mortgage rate is the interest rate a mortgage lender charges on a mortgage. Basically, the mortgage rate is what the mortgage cost you.
The lower the mortgage rate, the less interest you pay and the smaller your mortgage payments are.
When you compare mortgage rates, the mortgage rates that are advertised are the annual amount that you will be charged on your mortgage.
Watch out for mortgages that advertise lower interest rates however come with restrictions. Plus, mortgages with a contract rate that is higher but you are offered cash on closing to offset it. Contact a mortgage broker in Ottawa to compare mortgage rates and deals to find the best rate and options for you.
Learn more: Mortgage brokers in Ottawa
What are the different types of mortgages?
There are two main categories of mortgages:
- Interest only
- Principal and interest
With an interest only mortgage your only responsibility is to pay the interest on the mortgage. With this mortgage you do not have a set amortization as the principal itself is not reducing. Generally you can pay as much or as little of the principal as you want. These mortgages usually do not come with a set term.
The monthly mortgage payment will be smaller with an interest only mortgage. The reason for this is, there is no principal is part of the payment.
For example, if you have a $250,000 interest only mortgage at a rate of 4.45%, your interest payment would be approximately $927 per month and $11,125 per year. At the end of the year, your mortgage balance outstanding would still be $250,000.
Principal and interest
With a principal and interest mortgage, a portion of your mortgage payment is made up of interest and principal and each payment reduces your mortgage balance. Your mortgage is paid off after a set period of time known as an amortization. The interest amount that makes up each payment shrinks with each payment made. Therefore, more principal goes towards your mortgage with each payment you make. Plus, the balance will be zero at the end.
With an interest only mortgage and a principal and interest mortgage there are two main types:
- Fixed interest rate
- Variable interest rate
Fixed interest rate
Fixed rate mortgages have a set interest rate for a term. This term typically ranges from six months to 10 years.
Learn more: Fixed rate mortgage
Variable interest rate
Variable rate mortgages have interest rates that can fluctuate during the term. The rate is typically based on a prime interest rate and a prime interest rate can change based on changes to the Bank of Canada overnight rate.
What do I need to get a mortgage?
One of the first things you need when getting a mortgage is a down payment. This is the amount that you put towards the property from your own savings or a family gift. Typically the minimum down payment is 5% of the purchase price. However, there are lenders that offer flex down mortgages where are you do not need to have a down payment saved.
Learn more: No down payment mortgage options in Ottawa
When you compare mortgage rates, the best mortgage rates are typically for those with a down payment of less than 20%. A mortgage insurer, for example CMHC, insures the mortgage. With that, the mortgage is safer for the lender.
If you have 20% down you fortunately do not have to pay the mortgage insurer premium. However, the interest rate is typically higher for those with 20% down.
Finding the down payment that works best for you can be a combination of a few factors. For example, how much money you have available to put towards the down payment and if you will have money left over after the down payment for emergencies, furnishing the house, saving for retirement and more. Plus. if you would like to avoid paying the mortgage insurer premium or not.
How do I compare mortgages and find the best one?
To find the best mortgage and the best mortgage rates you need to look to your goals. For example, is your goal to have the ability to fix your mortgage payment to assist you with budgeting? If so then a fixed rate may be the best option. Alternatively, is your goal to possibly achieve a lower rate during the term and you are willing to take the risk of not having a fixed interest rate to do so. If so then a variable interest rate may be your best option. On the other hand, if you’re comfortable fluctuations in interest rates and want to have the lowest payment then you may consider an interest only mortgage.
Contact me today to help you find the best mortgage for your needs, goals and budget.
Is refinancing the same as getting a mortgage?
Refinancing is similar to when you first get a mortgage as you need to apply for a mortgage refinance. For this you need to provide documentation, have your credit checked and more.
Instead of confirming your down payment however a lender will confirm other details. For example, your existing mortgage balance, the current value of your home, your current property taxes and so on. In Canada you cannot refinance a home with a traditional under beyond 80% of the current appraised value. It’s important for the lender to be able to determine the current value of your home. There is an app for your smartphone that can assist with determining the value of your home. MOPOLO is the name of this app.