MORTGAGE 101

Short term rates vs. long term rates

Deciding on the type of mortgage to choose can be overwhelming. Mortgage terms vary between variable and fixed rate, 6-month terms to 10 year terms. Taking a variable or floating rate mortgage can have savings. Typically the shorter the term or guarantee of the rate, the lower the rate will be. This is not always the case, depending on the market place and the economy, although history has shown that short-term rates tend to be lower than long-term rates. The bonus of a variable rate is the strong potential for interest rate savings; however, you lose the security of having a guaranteed interest rate. If you are considering a variable rate mortgage you need to look at your own risk tolerance and your cash flow available to deal with potential increased payments. It is vitally important that you consult an expert when considering your mortgage options.

Weekly and bi-weekly payments

Most mortgages provide the option of making payments on a weekly or bi-weekly basis. There are two reasons these options might be desirable: 

It can save you money as you can expect to pay off your mortgage a lot sooner, which can have dramatic savings over the life of your mortgage. 

If your employer pays you on a weekly or bi-weekly basis, you can simplify your budgeting by making the payment line up with the way you are paid.

Making extra payments

Paying extra amounts on your mortgage can make a big interest saving over time. When deciding upon a lender it is important to look at what their privilege payment options are. A 20% privilege payment will allow you to pay off up to $20,000 per year on a $100,000 mortgage. It is also important to find out if the privilege payment is flexible, to allow you to pay smaller payments as often as you want. An extra $1000 periodically paid on a mortgage can help you become mortgage free faster.

Reducing the CMHC fees on your purchase

When you require a mortgage for more than 75% of the purchase price of a property, that mortgage must be insured by Canada Mortgage and Housing (CMHC) or GE Mortgage insurance. The premium charged by these company's decreases as the down payment increases. When you finance your property at 95%, a premium of 2.75% is added to the mortgage. By increasing the down payment to 10% of the purchase price the premium can be reduced to 2.5%. If you can put down 25%, you can avoid any additional insurance fee. Depending on your situation there are ways that you can structure this financing to avoid the CMHC or GE insurance premium.

Advantages of bigger downpayments

As mentioned above, when you put a 25% down payment on your purchase you can avoid the CMHC premium. More importantly the larger the down payment, the lower the amount of interest you will pay over the life of your mortgage. It is important to note that it may not be wise to stretch yourself to increase your down payment and end up borrowing on credit cards or a line of credit at a higher rate.