Ins and Outs of Mortgages

Find out which mortgage is right for you

With so many different types of mortgages it can be difficult to choose the mortgage that best fits your lifestyle and financial situation. As your financial advocate we are here to help you wade through the choices and help you set up a plan that will help you pay off your mortgage as fast as possible and still have the lifestyle you want. Below is a list of common mortgage options available in the marketplace along with details on how each one works.

Variable rate mortgage

A variable rate mortgage has fixed payments, the interest rate you pay fluctuates with changes in interest rates. This means that the amount paid on the principal will vary depending on the rise and fall of interest rates. If interest rates go down more of the payment goes to principal and if interest rates go up, more of the payment goes towards interest. The great thing about a variable rate mortgage is it’s completely open; you can make larger payments or payoff the mortgage at any time without penalty and the rate that you pay is usually one of the lowest available rates. The downside is that because rates are not fixed you take on some risk. So if you loose sleep worrying about the possibility of a rate increase, then a variable rate mortgage is not for you. A variable rate mortgage is best suited for someone who is not risk averse, and is able to monitor markets, switching to a fixed rate should the need arise. It is also a great choice for someone who is in a transitional period, or has a lower mortgage where rate increases do not hit as hard.

Short-term fixed mortgage

Your mortgage is calculated on a one-year term with a low interest rate. Since the rate is fixed you are protected against short-term rate increases. While you’ll enjoy lower payments over the one year term you are not protected against any increase in rates at the end of the term. An increase in rates will translate into bigger payments in the next renewal period. With this in mind a short-term fixed rate works best if interest rates are forecasted to decrease, or for members who are willing to take on a medium level of risk. This mortgage also works well for members who have good cash flow, and are not on a tight budget.

Fixed medium-term mortgage

Based on a two-to-five year term, this option gives you more protection from rate increases. While this protection allows you sleep at night it locks you into both the term and the rate. There are penalties for paying out early and should interest rates drop you will be paying more interest than the current market rate. However, for someone needing stability and the comfort of knowing their payments will be fixed for a longer period this is the best type of mortgage. It is a favourite of young families, first mortgagors, and those members who plan to be in their home for a long while.

Umbrella mortgage/total equity plan

This type of mortgage is also referred to as a wraparound or total equity plan. Its main feature is that one or more products are rolled into one mortgage for a specific credit limit. In most cases the credit limit is set at 75% of the appraised value of your home. This plan can include several different mortgage options such as fixed rate mortgage, equity line of credits, and/or credit card all at different rates within the one mortgage. You only need to apply once and the credit is always there when you need it. Sounds great but if you are not disciplined you could get trapped and finish the amortization period owing the same amount as you started. The risk here is that you end up never really owning your home.

High ratio mortgage

Any mortgage that requires borrowing more than 75% of the appraised value of a home is considered to be a high ratio mortgage. The mortgage must include the purchase of mortgage insurance through Genworth Financial or Canada Mortgage and Housing Corporation (CMHC). This insurance protects the financial institution lending the money, if the mortgage cannot be repaid. What’s great about high ratio mortgages is that it allows you to get into your home without having a large down payment. In fact the requirement can be as little as 5% down. But you have to remember that the size of the down payment determines the amount of your insurance premium which range from 5% to 15%. Paying a 15% insurance premium rather than 5% is a significant difference and one that may not be in everyone’s best interests. Including the premium in the amount that is borrowed can significantly increase how much interest is paid and the length of time it takes to pay the mortgage off.

While this list covers the basics of borrowing for your home, each members’ mortgage needs are specific to their unique financial situation. Please come in and talk to us. We’ll show you the best mortgage for you and your financial well-being.