Your First Mortgage

Obtaining your first mortgage is a big step for any new homeowner. Whether you are planning to buy a new condo in British Columbia or a new house in Ontario, there are many decisions to make when it comes to the type of mortgage that will best suit your needs. Your best source for information and guidance will be your mortgage broker, but there are many things you can understand before getting to that point.

Before you get a mortgage, the lender will want as much financial information about you and your co-buyers as possible in order to check your ability to repay the loan. Your Gross Debt Service (GDS), Total Debt Service (TDS), assets, liabilities, earnings, employment history as well as your past record of repaying loans will all be reviewed as part of your mortgage application. For a detailed list of the information that is required, you can request a consultation with a mortgage broker.

The two main categories of mortgages in Canada depend on your down payment. If you pay 25% or more of the purchase price as your down payment, you will have a conventional mortgage. Anything less than 25% of the purchase price as a down payment will give you a high-ratio mortgage. A high-ratio mortgage must be insured and there will be an insurance premium. Mortgage insurance protects the lender and the premium is typically 1.25% to 3.75% of your total mortgage amount. This premium can be added to the principal balance and paid off as part of your mortgage, or it can also be paid off in total at the time of your purchase.

Once you have a conventional or high-ratio mortgage, there are three main types of mortgage payment options available to home buyers in Canada; a closed mortgage will remain unchanged for the term that you agree to. This can be a good route to choose as closed mortgages generally provide lower rates than open or convertible mortgages, but there will be a penalty if you pay out, renegotiate or refinance before the end of your term. An open mortgage may be repaid completely or in part at any time during your term without any penalty. This flexibility can be useful until you are ready to be in a closed term mortgage, or if you are planning to pay off your mortgage in full before the end of the term. Remember that you will be affected by fluctuating rates in an open mortgage. A convertible mortgage can be changed into a longer, closed mortgage at any time with no penalty. This type of mortgage is beneficial when mortgage rates are on the rise, and it also allows you to pay up to 20% of your original mortgage amount annually.

The types of rates available are important to note as well. A fixed interest rate will not change throughout your mortgage term. With a fixed rate, your payments will be consistent, making budgeting more accurate and you will have the security of knowing exactly how much of your mortgage will be paid off at the end of your term. With a variable rate, your rate will fluctuate with the current market during your term. Although there is less security and the amount of your payment going towards your principal will be inconsistent, in general, variable rates have been lower than fixed rates and could save you money. When the rates go down, a larger part of your payment goes toward the principal and your regular payment may stay the same even if rates change.

When applying for your first mortgage in British Columbia or Ontario, deciding on the type of mortgage that suits you best depends on your risk comfort zone. If you are comfortable with interest rate fluctuations, want flexibility in terms of when you can pay off your mortgage or refinancing, and are willing to play the market believing that the rates will decrease, a higher risk plan may be the best choice for you. High risk is also better for you if you are planning to sell your home in the near future or if you have a long-term mortgage strategy. A medium risk mortgage could be the way to go if you want to take advantage of low prime rates, or if you’d like to have the ability to pay down your mortgage with accelerated payments. These medium risk options generally have small rate increases and allow you to have the flexibility to lock into a fixed rate with no penalty. A low risk mortgage will offer you rate and payment consistency with the option of flexibility. This can be a good choice when the rates are increasing, if you are not planning to sell or refinance your home in the near future, or if you are a first-time home buyer.

Creating a mortgage strategy is something your mortgage broker will assist you with, but it is important to be aware of the many factors that can influence the ease of paying off your mortgage. Be aware of your payment privileges and flexibility as these will outline how much you can pay off in a year and whether you can increase your payments or negotiate your amortization. Payment frequency determines your payment schedule and penalty clauses could mean added costs for refinancing or breaking your mortgage. Portability and assumability deal with whether you can transfer your mortgage to your next home, or allow you to assume the existing mortgage on your new property. Having a mortgage strategy tailored to your needs and plans will ideally allow you to pay off your mortgage at a comfortable speed as well as save on interest costs and allow you the flexibility you will want when you make your next move.

Once you understand the options available to you, you will be better able to decide the type of mortgage that will be best for you. By working as a team with your mortgage broker and any co-buyers, you will be able to find a plan that fits your needs and will make your first mortgage an exciting step in your life.

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