Basic mortgage options
In recent years the number of mortgage options has grown dramatically.
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Some of the options to consider are:
1. Closed vs. open mortgages
2. Fixed vs. variable rates
3. Payment options
4. Pre-payment options
5. Portability
6. Assumable
Closed Mortgage
In a closed mortgage, the interest rate is locked in for the full term of the mortgage and you will usually be charged a penalty if you pay off this type of mortgage early. This is known as an early payout penalty, which goes to the mortgage lender. If you want to renegotiate the interest rate or pay off the balance prior to the end of the term.
Closed mortgages generally offer lower interest rates than an open mortgage and work well if you are not planning to move in the short term. Or if you are going to move you intend to continue owing a home.
Closed mortgages are available in a full range of terms from six months to 25 years and include both fixed and variable rate options.
Open Mortgage
Open mortgages offer greater flexibility than closed mortgages. They can be repaid either in part or in full at any time without payout penalties.
Open mortgages are a good option if you are planning to move in the immediate future or if you believe that interest rates are going down. Interest rates for open mortgages are generally higher than for closed mortgages because of the added flexibility.
Fixed Rate Mortgage
The interest rate for a fixed rate mortgage is locked in for the full term of the mortgage. Payments are set in advance for the term, providing you with the security of knowing precisely what your monthly payments will be throughout the entire term. Fixed rate mortgages can be open (may be paid off at any time without breakage costs) or closed (breakage costs apply if paid off prior to maturity).
Variable Rate Mortgage
With a variable rate mortgage are tied to the lenders prime lending rate which is in turn linked to the interest rates set by the Bank of Canada. When you hear on the news that interest rates are going up or down it is usually the Bank of Canada rates that they are referring to.
In most cases the lenders adjust both the interest rate and the monthly payment amount when there is a change to their prime lending rate. There are some lenders who adjust the interest rate but keep the payment the same throughout the term of the mortgage. In this case the amount going towards repaying the mortgage changes. This could result in your mortgage having a longer amortization than you initially planned for.
Variable rate mortgages may be open or closed.
A variable rate mortgage provides you with the flexibility to take advantage of falling interest rates and to convert to a fixed rate mortgage at any time.
Interest Only Mortgages
Generally, we encourage our clients to make every effort to pay off their mortgages as quickly as possible so that they can save money on their interest costs. However there are some cases where it may make sense to get an interest only mortgage.
By paying only the interest on your mortgage, you can reduce your monthly mortgage payment. You will have more funds available for other needs. Redirecting money that would have gone toward paying principal on your mortgage may complement your overall financial plan and potentially help you grow your wealth.
An interest-only financing solution can allow you to:
- Take advantage of potential tax deductions.
- Manage unforeseen expenses.
- Repay higher cost, non-deductible consumer debt.
Some other options to consider:
Payment Options
Weekly, bi-weekly, semi-monthly or monthly payment plans are available depending on the mortgage you choose. Terms of six months to five years with amortizations up to 25 years give you complete flexibility in lifestyle planning.
Pre-payment options
This allows you to pay addition amounts over and above your regular monthly payment without incurring any penalties.
Depending on the lender, it can include lump sum payments of between 10 and 25% of your principal. This could include doubling your monthly payment. All these additional payments go directly to the principal. These pre-payments can result in a significant savings over the life of a mortgage.
Mortgage Portability
This option lets you transfer the interest rate and all the existing terms and conditions of your current mortgage to your new home. You will be subjected to a credit review and property appraisal when you make the new home purchase. You may also qualify to add-on to the mortgage if you require a larger mortgage amount.
Depending on current rates and your final blended rate with the add-on, your modified monthly payments could be more economical than they would be getting a new mortgage.
By "porting" your mortgage, you automatically avoid any prepayment charges for breaking your mortgage early.
There is no charge for using this portability option. Legal fees would apply to register the mortgage on your new home.
The mortgage portability option cannot be used in combination with the assumable mortgage option.
Assumable Mortgages
You can use this option to offer your mortgage to a prospective buyer. If he/she qualifies for the mortgage, they can take it over with the purchase of your home. Allowing your buyer to assume your mortgage, particularly if it's a low-interest, longer-term mortgage, is a good tactic in a buyer's market, especially when mortgage rates are rising.
When there are more homes for sale than potential buyers, an attractive mortgage rate can help boost the appeal of your home and swing a sale in your favour. If rates are on the rise, your low-rate mortgage gives your buyer built-in monthly savings until the end of your mortgage term.
Assumable mortgages are an option if:
Your buyer assumes your mortgage, you can be relieved of all responsibility related to its fulfillment.
Your buyer assumes only a portion of your mortgage. Then you may be required to pay a prepayment charge on the unassumed balance.
Your buyer needs an amount that's higher or lower than your outstanding mortgage balance. Here’s what happens:
A higher amount is required; the buyer can apply to Add-on to the existing principal balance.
The buyer needs less than your outstanding mortgage balance, the amount required is transferred to the buyer and you pay off the difference. The balance that has not been assumed may be subject to prepayment charges.