Choosing the right mortgage for you

Barring exceptions, you cannot do without a mortgage loan for the purchase of a property. Several factors and details that sometimes seem trivial can have a big impact on the total interest cost as well as the payments.

It is recommended to be accompanied by a professional to choose your mortgage. It's just as beneficial to know your options and understand the basics of the mortgage vocabulary.

The influence of the down payment on the amount of the loan

Determining how much to put down for the purchase of a property is the very first step before even asking yourself about the possible mortgage loan options. The amount you pay on your property when buying will influence the amount of your loan.

  • The down payment will be deducted from the purchase price, which will reduce the loan amount.
  • If your down payment is less than 20% of the purchase price, you will need to pay for mortgage loan insurance, which will be added to your mortgage.

Example of How the down payment affects the total cost of your mortgage

To learn more about the down payment, read our article which discusses the subject in depth: Down payment for the purchase of your first house: what you need to know.

Types of mortgage interest rates

A fixed rate or a variable rate mortgage? What is the difference? Which option to choose?

Fixed Rate Variable Rate
A fixed rate implies a rate that will remain the same for the duration of the term. A variable rate implies a rate that changes according to the market rate.
  • Payments remain the same for the entire term giving you peace of mind.
  • It's ideal if you can't (or don't want to) accommodate a variation in payments in your budget.
  • It may be preferable when a rise in interest rates is expected in the short term to protect you.
  • The variable rate is generally lower than the fixed rate.
  • It requires your budget to allow for higher payments if rates go up.
  • It may be preferable when a decline in interest rates is expected in the short term.

 To choose the right option for you, you must first assess your risk tolerance. Can you continue to make your payments if the rates go up? Are you ready to deal with unexpected market variations? Ask your mortgage broker or your financial institution to make a well-considered choice.

An open vs closed mortgage

An open mortgage offers the flexibility to repay the loan with full payment or large payments at any time during the term without penalty.

A closed mortgage generally offers a lower interest rate, but does not allow the same flexibility. Depending on the lender, you will be limited on the prepayment amount you wish to repay and will pay a penalty if you exceed this limit.

Mortgage amortization

Amortization is the process of repaying the loan through periodic (e.g. monthly or bi-weekly) payments of principal and interest.

The amortization period of a mortgage is generally between 10 and 25 years. When choosing the amortization period, you must consider the following points:

A shorter period means paying less interest, but the payments are more important.

Longer amortization means paying more interest, but it reduces the amount of payments.

Thus, you must choose your amortization period according to your ability to make the payments. You must also take into account other costs related to the property (e.g. electricity, maintenance, snow removal, etc.).

Here is an example of the influence of the amortization period on the total interest cost with a mortgage of $300,000 and an interest rate of 4%.

Amortization Total interest cost
10 years $63,919
15 years $98,541
20 years $135,057
25 years $173,418

Example source: Government of Canada 

Example of the influence of the amortization period on the total interest cost

What is a mortgage term?

A mortgage term is the length of time the financial institution has agreed to lend the money. It usually lasts from 6 months to 5 years, after which the mortgage loan is renegotiated. In other words, your mortgage interest rate is in effect for the duration of the term.

A longer term is more advantageous when rates are low and tend to rise, while a shorter term is more attractive when rates are high.

 

Several factors must be taken into account to choose the mortgage that suits you according to your short and long-term needs. Taking the time to evaluate your options will allow you to find the best rate and the best possible conditions to make the most of your investment.

Whatever your situation, your mortgage broker or financial institution will help you choose a mortgage that's right for you. Sutton real estate brokers can also put you in touch with our mortgage partners, who are equipped to respond to all purchase situations.