Mortgage Features

There are many different features within a mortgage that a borrower has to choose from. The features of the mortgage are matched to the borrower’s need, goals, and risk assessment. The following is a list and description of the most common mortgage features. Choosing a mortgage that is the best fit for a borrower can be difficult without professional advice. For this reason please call Harpreet Singh The Mortgage King at (416) 795-1919 for a free consultation.

At a glance the most common features are:

Interest Rate
Term
Conventional vs. High Ratio
Open vs. Closed
Fixed vs. Variable Rate
Amortization
Assumability
Portability

Details are as follows:

Interest Rate

The interest rate refers to your cost of borrowing. It is the price you pay on the amount borrowed as a percentage. Typically it is compounded semi-annually. Interest rates often fluctuate and vary between lenders, thus it is a good idea to give us a call for the most recent rate that can be applicable to your specific scenario.

Term

The term of a mortgage refers to the length of time that you are committed to a certain lender. A standard mortgage typically has many terms, rather than just a single 25-year commitment. Terms can vary from 6 months to 10 years, and can be transferred between lenders. Choosing a term is very specific to your individual situation in regards to goals and interest rate tolerance. For professional advice and an evaluation of your situation please give us a call.

Conventional vs. High Ratio

A conventional mortgage is when the borrower provides a down payment of at least 20% of the purchase price or appraised value of the home, whichever is less. A conventional mortgage is not required to be insured against default. A high ratio mortgage is when the borrower provides a down payment of less than 20% of the purchase price or appraised value of the home, whichever is less. Currently, the minimum down payment required is 5% according to regulation. A high ratio mortgage is required to be insured against default from one of the three mortgage default insurers. The premium can be paid on closing, but is usually added to the total mortgage amount.
To have a look at the current premiums Click Here or to calculate how much your premium will be have a look at our CMHC Insurance Calculator

Open vs. Closed

An open mortgage allows the borrower the option to prepay all or part of the principal amount at any time without penalty. Typically there are limits and conditions that apply to open mortgages and not all lenders offer them. They are available in terms of 6 months or 1 year and the interest rates tend to be higher than a closed mortgage. Open mortgages are usually sought if the borrower is thinking about selling the home quickly, or is waiting on money to pay off a significant amount of the principal. Closed mortgages do not allow prepayment or early repayment of the principal, except on the sale of the property. The borrower is restricted to the predetermined payment schedule. They are available in terms from 6 months to 10 years and the interest rate tends to be a lot lower than an open mortgage. Closed mortgages are a lot more popular than open mortgages and prepayment usually results in a penalty.

Fixed vs. Variable Rate

In a fixed rate mortgage, the interest rate is predetermined and remains the same for the term of the mortgage. The monthly payment of principal and interest does not change throughout the term. It is a good idea to take advantage of low rates by locking into a longer term fixed rate mortgage. On the opposing side, there is the variable rate mortgage or adjustable rate mortgage. The rate is based on the Bank of Canada prime lending rate and the payments of principal and interest reflect accordingly. The mortgage payment typically remains at a constant amount, however the amount of interest and principal paid varies and fluctuates. When interest rates are low, you pay more principal and less interest, and vice versa when interest rates are high. If mortgage rates rise significantly, the lender may ask you to increase your monthly payment. To prevent high levels of consumer debt, lenders usually allow variable rate mortgages to be converted to a fixed rate mortgage at any time and without penalty. Also, lenders sometimes cap the maximum allowable interest rate to protect the borrower.

Amortization

Amortization refers to the period that it would take to repay the entire mortgage amount. Currently amortization periods vary and can be up to 25 years in length. The longer the amortization, the smaller the monthly payment, but greater the interest paid over the life of the mortgage. Amortization can be modified and shortened by making accelerated payments, lump sum payments, or using your prepayment privileges.
For a more detailed and thorough explanation on shortening your amortization please visit our Paying Off Your Mortgage page.

Assumability

Assumability allows the purchaser to take over the already existing mortgage on the property being purchased. This can serve as an attractive feature for a potential buyer if the locked-in rate available with the assumable mortgage is lower than the current market interest rate.

Portability

Portability allows the borrower to transfer the current mortgage of a property to another property that he/she may be buying. This is useful if you have locked-in a great rate and decide to sell the current home and purchase another. In this case, your interest rate will remain the same, even though the current market interest rate may have increased.
 

For a more in-depth and professional review of your individual and personalized situation please give Harpreet Singh The Mortgage King a call at (416) 795-1919.

Connect with us on:
FacebooktwitterFacebooktwitter
css.php