A mortgage is a loan that finances the purchase of a home or property, and the main components of a mortgage are your principal and interest. Here are a few terms you will hear as you search for the right mortgage:
- Principal: The principal is the amount of money you borrow to purchase a property. The higher your initial down payment on your home, the less principal mortgage amount you will have to borrow for your mortgage.
- Interest: Interest is what you are charged to borrow the money for your mortgage.
Generally, a minimum down payment of 5% is required when applying for a mortgage in Ottawa. However, Chris does have access to no-down payment mortgage options. This is great for first-time home buyers who have recently come out of school and haven’t been able to effectively save enough for a down payment.
There are several types of mortgage options available to Ottawa home buyers. Here’s a breakdown of some options you may consider:
- Conventional/Low Ratio Mortgage: This type of mortgage is available if your down payment is 20% or more of the total value of the property you are buying. With this type of mortgage, you generally do not need mortgage protection insurance from CMHC.
- High Ratio Mortgage: This mortgage is for homebuyers whose down payment is less than 20% of the total value of the property being purchased. Mortgage default insurance will be included as part of a high-ratio mortgage. A high ratio mortgage is generally only available for owner-occupied homes.
- Open Mortgage: This mortgage offers more flexible options, so you can repay the mortgage at any time without a penalty. These types of mortgages will generally have higher rates than with closed mortgages.
- Closed Mortgage: Most mortgages today are registered as closed mortgages. In the event where you want to pay off the mortgage in full during your contract, you will be required to pay a penalty for breaking your contract. Generally, you will have the opportunity to increase your payments and make lump sum payments during your term. In most cases, these pre-payment options will allow you to pay off your mortgage in full in less than 5 years.
- Fixed Rate Mortgage: With this mortgage, your rate is fixed and will not change for the length of the mortgage contract, otherwise referred to as the mortgage term.
- Variable Rate Mortgage: These mortgage interest rates are determined by the prime rates of the lender. These rates and your payments can fluctuate during your contract term. Banks can charge you a surplus or give you a discount on the prime rate at the time you apply for your mortgage. Assuming the financial institution has given you a discount on the prime rate, you will be guaranteed the discount during the length of your contract term which is generally 5 years. It is, in fact, the bank of Canada and the banks’ prime rate that can fluctuate, and in turn, make your overall interest rate and your payments change.
There are many different factors affecting your mortgage rate, including your personal credit history, your down payment, and your annual income, but the main indicator of your rate relies heavily on the kind of rate you’re getting. There are two main types of mortgage rates: a variable mortgage rate and a fixed mortgage rate. The different rates are influenced for different reasons.
A variable/floating mortgage rate is primarily determined by lenders’ prime rates. Financial institutions can charge you a surplus or give you a discount on the prime rate. This surplus or discount is guaranteed during the course of your term, which is generally three or five years. However, it is the prime rate that fluctuates and, in turn, makes your overall interest rate change. Generally, financial institutions will follow the Bank of Canada’s prime rate for determining their prime rate for your mortgage.
A fixed mortgage loan rate is strongly influenced by the yield on Bond Market Yields (the Canadian government’s bonds). This is because bond yields determine the cost of capital for financial institutions; they reflect the cost of funds for the lowest level of risk over a specific period. In a fixed mortgage, the interest rate is determined before the loan begins, granting you more security in knowing your monthly payments and being able to plan ahead.
This may seem complicated, but there are many varying factors that influence the different types of mortgage rates. If you have any questions, or if you’d like to learn more about the typical mortgage rates in Ottawa at this time, contact Chris Allard. He is happy to answer any questions you may have, free of any obligation.
Despite what you may believe, rising interest rates can affect your fixed rate product. Mortgage renewal rates are affected by rising rates. This is why it is important to discuss your options and what they’ll look like long term with an experienced mortgage broker, so contact Chris to get started.
IT’S FREE! At least, it is usually free for the average borrower. A mortgage broker has your best interests at heart. They do not have any obligations or loyalties to any one financial institution. They negotiate the best rates for you on your behalf. They can do this because Chris and Dominion Lending Centres represent $33 billion per year of mortgage volume! Therefore, banks give Chris and his clients discounts on mortgage interest rates.
Chris Allard is recognized in the Ottawa region for his excellence in customer service. This has helped him fund over $30 million in mortgages in 2016 alone. He has also received several awards, including having finished in Canada’s top 50 brokers from Dominion Lending Centres in the category of monthly volume funded. Contact him for a no-obligation consultation today!
A pre-approved mortgage gets you a rate guarantee before you take out a mortgage. This can make you more attractive to sellers while negotiating an offer to purchase. It reassures the seller that you can be approved for a mortgage. This rate hold Is generally guaranteed for 90 to 120 days.
60% of first-time homebuyers break their mortgage contract. If the borrower has a 5-year fixed rate mortgage, for example, and they need to sell to move to a different city because of work, because their parents are sick, or because a relationship breakup with their partner, the mortgage contract is often broken. In those instances, you will want to pay as little as possible in penalty costs. However, big bank mortgage penalties are often more than 3% of the balance of the mortgage. Most mortgage companies, on the other hand, have smaller mortgage penalties, often up to 5x smaller than with big banks. This can mean the difference between paying a mortgage penalty of $2,500 or $12,500.
In many cases, financial institutions register mortgages as a collateral charge, registering the mortgage for a higher mortgage amount. This is a great thing for borrowers who have a lot of equity in their home, or who will have a lot of equity in their home. It allows the borrower to request a secured line of credit without the legal costs associated with refinancing. The disadvantage, however, is that at the end of your mortgage contract term, if your mortgage is registered as a collateral charge, it can be difficult to move your mortgage from one lender to another and take advantage of lower rates. This is because the new lender often has to take on legal costs to switch the mortgage from the previous lender to them. If you have very little equity in your home, then a collateral charge mortgage is probably not right for you.
Mortgage penalties will be calculated differently depending on the lender. Some lenders will base penalties on posted rates, which can inflate your penalty, while others use bond yields or a percentage of your balance. To understand these penalties, it is important to consult an expert. Talk to Chris and he will be happy to go over your options with you.