What type of mortgage should you choose?
Today, more than ever, there are numerous mortgage options available. Don't be confused! Here at Gibbard Group Financial, our Mortgage Consultants can help you find the best product for your needs and negotiate you the best rate. We do the research for you, enabling you to avoid the frustration and confusion of having to do it yourself, and are here to explain the available options.
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.
You must have at least a 5% down payment when you buy a home. Any purchase where the down payment is between 5% and 19% is considered a high-ratio mortgage, and the mortgage must be insured by the Canada Mortgage and Housing Corporation (CMHC) or Genworth Mortgage Insurance Company (GEMICO). 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 7.40% of the principal amount of your mortgage. This amount can be paid up front or added to the principal portion of your mortgage. A Mortgage Consultant at Gibbard Group Financial can help you determine the exact amount.
Types of mortgages:
Fixed rate: 6 month, 1, 2 & 3 year (open and fixed) 4, 5, 7 & 10 year fixed. There is one lender that can even offer a 15, 18, and 25 year term. 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.
3, 4 and 5 year (open and closed) Most variable rate mortgage can be locked into a fixed rate mortgage without penalty providing you lock in for at least the remainder of the term. With a Variable-rate mortgage, your rate will be set in relation to the prime rate and 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 the rates change, your payment may or may not change depending on the lender.
Open or Closed
Open mortgages can be paid off at any time without penalty and are usually negotiated for very short terms. 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. Generally speaking, the closed mortgages are usually at a cheaper rate than the open mortgages.
What terms and payment options should you choose?
It all depends on what you want. Your Gibbard Group Financial Mortgage Consultant will assess your personal situation and needs to find the best mortgage for you at the best rate. There are a number of payment options to choose from such as weekly, bi weekly or monthly. Please note that not all lenders offer these payment options with all their products. Contact us to go through your options.
Short term risk and variable
If rates are low and stable, and/ or you are prepared to take a risk, you can generally pay a lower rate with a short -term mortgage. You simply roll over your term every 6 months, or float your rate against prime, with the option of locking in to a longer term at a later date. This is not for everyone; however, as sudden upward rate movements can have a significant impact on your payments. You may want to discuss this with your Gibbard Group Financial Mortgage Consultant. A short-term mortgage may be the way to go if:
- You expect to pay off large chunks of your mortgage or sell your home within the next three years
- You have a short remaining amortization (e.g. 5-6 years or less)
- Your credit is subpar and you need a non-prime mortgage just long enough to rehabilitate your credit so you can qualify with a prime lender
- You need to refinance in coming years to access your equity for a life event, education, investment purposes, business use, etc.
- You strongly believe that rates won't rise in any meaningful way over the next 12 months, you can afford to be wrong, you've found a short-term rate that's far lower than long-term rates, and you can make higher-than-required payments.
Any term 3 years or longer is considered "long term" in today's economy. Because long -term rates are usually higher than short -term rates, you may not want to choose this option. On the other hand, by locking in you will avoid exposure to rate increases. You'll have the comfort of knowing exactly what you payments will be and you'll be able to manage your budget accordingly. A long-term mortgage makes sense if:
- A 25-to-30-per-cent-plus payment increase would cause you financial stress. (That's the payment hike that a short-term borrower might face if rates rise as economists project.)
- Your "emergency fund" covers less than six months of living expenses
- You have minimal equity and net worth
- There's a chance your earnings could drop due to job instability, a highly variable income, upcoming retirement, an educational leave, an extended care leave, etc.
- You're heavily invested in long-term fixed income, which creates more risk to your "personal balance sheet" if you've also got a short mortgage term and rates surge
- You want greater certainty when projecting cash flow on an income property
Many lenders allow you to make a lump sum payment — usually 10% to 20% of the original principal balance. In addition, many mortgage products now include a "double -up and skip -a -payment" feature. This lets you "bank" extra mortgage payments for a rainy day, at which time you can "skip" them if you need to. Ask your Gibbard Group Financial Mortgage Consultant to advise you on your options today!
Most mortgages now allow the amortization to be adjusted by increasing the payment on closed terms by 10% — 20% per year, once annually.
Most mortgages now come with the option to pay your mortgage at a frequency that matches your cash flow — weekly, bi -weekly or semi -monthly. The added benefit of the "accelerated" weekly and bi -weekly payments is that by dividing a regular monthly payment into two or four respectively, and deducting it at the new interval, an extra payment a year is made directly against principal. The surprising effect of this one extra payment a year is to reduce the amortization of the average mortgage by approximately 5 years, with cash savings at the end of the mortgage term.