Home Loans
Selecting The Right Mortgage Scheme
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In the Canadian financial market, there are plenty of mortgage options available for the homebuyers. Lending institutions in the country offer different products and the products are so many that an average customer may get confused in decision making. This article intends to clear this confusion by properly depicting the broad contours of mortgage products in terms of basic characteristics.
At the outset, its important to understand that though many of the available mortgage products may appear out to be similar products, all of them do have different characteristics — if not major, then at least slight. These products are construed according to the affordability and suitability of different categories of consumers.
For instance, some home buyers prefer fixed rate mortgage while others opt for variable rate instruments. The final decision has to be taken by the prospective borrower on the basis of an analysis of his own affordability. The choices available to him in terms of mortgage products are:
Conventional or High Ratio
A conventional mortgage is a loan which does not go beyond 75% of the appraised value or purchase price of the property. The remaining amount which is 25% of the purchase price has to be coughed up by the borrower as the down payment.
If a borrower in Canada is not in a position to pump in 25% of the purchase price at the time of buying, and his loan amount has to go beyond 75% of the appraised value of the house, the option he has is to opt for “High Ratio Mortgage”.
Under this scheme, the borrower has to put in at least 5% from his pocket as down payment. Down payment level ranging from 5% and 24% is considered as high-ratio mortgage and it is mandatory to get it insured by the Canadian Mortgage and Housing Corporation (CMHC) or GE Capital Mortgage Insurance Company (GEMICO). The insurer obviously will charge a fee for providing this service.
The fee amount is calculated on the basis of quantum of borrowing and down payment percentage level. Normally, the insurance fee is between 0.5% to 3.75% of the appraised value of the home. While this amount is normally paid up front, there is also this additional facility of adding it up to the principal amount of your mortgage.
Short-term or Long-term
The “term” denotes the duration of the mortgage agreement. A mortgage validity generally has a shelf life of six months to 5 years. Shorter the term, lower the interest rate — this is the bottomline. A “short-term” mortgage is usually for two years or less whereas a “long-term” mortgage is generally for three years or more.
Short-term mortgages are beneficial for buyers who have this anticipation that interest rates will take a dip around renewal time. Long-term mortgages are suitable for those who believe in long term budgeting and have a fair idea about their income levels in the future. After the expiry of a term, the balance of the principal owing on the mortgage can be repaid or a new mortgage deal can be drawn at the prevailing interest rates.
If you have chosen a fixed-rate mortgage, there will be no change in the interest rate throughout the term of the deal. You will be paying the same amount year after year and you will always have the precise information about your instalment obligations. You will be in a better command of your resources.
Variable rate mortgage is quite opposite of this. In this case, your interest rate will be set in relation to the lending institutions Mortgage Prime Rate at the beginning of each month which changes every month almost in a regular fashion.
So your monthly commitment will also undergo a change every month. Traditionally, variable rate mortgage is considered to less costly than fixed rate instrument provided the inflation rate is stable. But if inflation shoots up, variable rate could cost you a lot. While there will be no change in the principal amount payment, interest charged on them will go up and you will have to pay more.
Open or Closed
Open mortgages facilitate you to pay off any time without any penalty being imposed on you for pre-payment. These mortgages are generally negotiated for very short periods and are beneficial to those who intend to sell the house in the near future or those who would like the debt burden to go off their head as soon as possible.
A closed mortgage, on the other hand, has a locked-in interest rate for the full term of the mortgage. So you can get out of them at the time of your preference. It’s the favourite instrument of majority of the first-time home buyers because it offers them the comfort of steady mortgage payments.
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