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- Conventional
Mortgages:
- Under
a conventional mortgage, a lender will normally
provide up to 75% of the appraised value or purchase
price of a property, whichever is less. You must
be able to provide at least 25% of the financing
on your own.
Example:
Purchase
Price:
Conventional Mortgage:
Required Down Payment: |
$
200,000.
$ 150,000.
$ 50,000. |
High Ratio or Insured Mortgage: - A
high ratio mortgage finances a higher percentage
- up to 90% - of the appraised value or purchase
price of the property, whichever is less. This type
of mortgage must, by law, be insured against non-immune
by either the Canada Mortgage and Housing Corporation
(CMHC) or the Mortgage Insurance Company of Canada
(MICC).
Mortgage insurance protects the lender against loss
if the borrower fails to meet the repayment terms.
The application fee (approximately $75) and insurance
premium (approximately 0.5% to 2.5% of the loan)
are paid by the borrower. The higher the ratio of
mortgage to down payment, the higher the cost of
insurance. Mortgage insurance may be subject to
provincial sales tax.
-
Example:
Purchase
Price:
Down Payment Available:
Assuming insurance premium of 2.5%
Amount of Mortgage:
Assuming Mortgage Rate of 8%
Total Interest would equal 8%
plus 2.5% equaling 10.5% |
$
200,000.
$ 20,000.
$
180,000.
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A
minimum cash down payment from your own resources is
required because mortgage lenders won't advance the
entire purchase price of a property. Your minimum down
payment would normally be 10%, however, a recent government
program has lowered the minimum to 5% for qualified
first time buyers. Another temporary program allows
first time buyers to use funds from their RRSP for their
down payment. Ask Maureen for details of these and other
government programs.
It's to your advantage to aim for a down payment of
25% or more, so you'll qualify for a conventional mortgage
and avoid paying the mortgage insurance premium. The
larger your down payment, the easier it will be to arrange
a mortgage and carry it comfortably. The smaller your
loan, the lower your interest expense will be, and the
more equity you will have in your home. Equity is equal
to the value of home minus the amount of your mortgage. |
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Once
you're settled on the type of mortgage that fits your
financial circumstance, you are ready to start considering
the various options available. Amortization refers to
the number of years it will take to repay the loan in
full - most commonly 25 years. Longer amortization periods
result in lower payments, but increase the total amount
of interest paid. If you can handle a shorter amortization
period, you'll achieve tremendous savings on the interest
cost of your mortgage and live mortgage free sooner!
Example: If you have a $100,000 mortgage with an 8%
interest
|
Amortization
Period
|
Monthly
Payments
|
Total
of
Payments
|
Total
Interest Paid
|
Interest
Savings
|
| 25
Years |
$
763.21 |
$
228,963. |
$
128,966. |
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| 20
Years |
$
828.36 |
$
198,806. |
$
98,805. |
$
30,161. |
| 15
Years |
$
948.15 |
$
170,667. |
$
70,668. |
$
58,298. |
| 10
Years |
$
1,206.41 |
$
144,769. |
$
44,769. |
$
84,197. |
Assuming constant interest rate for entire amortization
period.
Each mortgage payment consists of interest plus repayment
of part of the principal. In the early years of a mortgage,
a higher portion of your payment is used to pay interest.
By the time you reach the last years of your mortgage,
almost all of your payment will be applied against the
principal. |
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- The
length of time for which the interest rate is fixed
is called the term. Most mortgages have terms of
six months to five years.
Open versus closed term:
-
An open mortgage is one which allows payment of
the principal, in part or in full, at any time without
penalty. Open mortgages tend to be for a short term
- usually six months or one year. Since open mortgages
offer greater flexibility than closed mortgages,
they usually have a higher interest rate.
A closed mortgage requires you to maintain a specific
payment schedule. A penalty usually applies if you
repay the loan in full before the end of the term.
A convertible mortgage allows you to renew your
mortgage at any time without penalty for a longer
term, closed mortgage.
- Short
versus long term
- When
interest rates are either high or falling, there
is a tendency to choose a shorter term mortgage.
This strategy pays off if you can renew at a lower
rate six months or one year later.
You may want to consider a longer term mortgage
if interest rates are rising, if you have limited
income or if you want to keep your mortgage payments
the same for a few years.
- The
effects of interest rates on the term
- As
a rule, you'll find interest rates rise with the
length of the term. The lowest interest rates are
usually associated with one-year mortgages. Higher
interest rates mean higher mortgage payments.
Example: If you have a $100,000 mortgage and 25
amortization
|
Interest
Rate
|
Monthly
Payment
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Total
Amount
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Total
Repaid
Interest paid
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| 6% |
$
639.81
|
$
191,943.
|
$
91,943.
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| 7% |
$
700.42
|
$
210,126.
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$
110,126.
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| 8% |
$
763.21
|
$
228,963.
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$
128,963.
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| 9% |
$
827.98
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$
248,394.
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$
148,194.
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**(Assumes
constant rate for the entire 25 years. Payment consists
of principal and interest.)
When you apply for a certain mortgage, you'll receive
an interest rate that is usually guaranteed for up to
90 days or until the day before closing, whichever comes
first. The interest rate on your mortgage will be the
lesser of the rate at application or on the day before
closing. If rates increase, you are protected. If rates
decrease, you should receive the lower rate.
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The
three most common payment frequencies are monthly, biweekly
and weekly. Increasing the frequency of your payments
can allow you to pay off your mortgage sooner and reduce
the total amount of interest paid.
You should select a payment frequency based on what
is convenient for you. You may want to match your payments
to your pay periods. If your goal is to pay off your
mortgage quickly, consider accelerated weekly or biweekly
payment plans. You'll make the equivalent of 13 monthly
payments each year, rather than 12, and realize significant
interest savings. Other options are to choose a shorter
amortization period or take advantage of prepayment
privileges.
Example: If you have a $100,000 mortgage, 8% interest
rate, 25 year amortization
|
Payment
Frequency
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Payment
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Total
Interest
Paid
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Interest
Saving
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Mortgage
Free
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| Monthly |
$
763.21 |
$
128,966. |
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25
Years |
| Biweekly |
$
351.29 |
$
127,720. |
$
1,246. |
24
yr. 10 mon. |
Accelerated
Bi-Weekly |
$
381.61 |
$
98,483. |
$
30,483. |
20
years |
Savings assume interest rate of 8% for entire 25 years
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Prepayment
privileges are voluntary payments in addition to your
regular mortgage payments. The money is applied directly
against the principal owing, so you'll pay off your
mortgage more quickly. You'll also significantly reduce
the total amount of interest you would otherwise have
paid.
Some examples of possible options available:
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You can increase your regular principal and interest
mortgage payment by as much as 100%.
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You can pay up to 15% of the original principal
balance in a lump-sum once annually or on the anniversary
date.
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All about mortgages
