Banks, credit unions and mortgage companies lend money to home buyers. This loan is called a mortgage. Your broker/lender will ask you to fill out a loan application form that includes information about your income, employment and debts, and will use this information to determine your eligibility for a mortgage.
Once you've decided on the type of home you want and the price range you can afford, it is usually recommended to apply for a mortgage pre-approval. This provides you with a fixed interest rate that is guaranteed for a set number of days (usually 90). The service is provided by banks, credit unions, and mortgage companies, and is free with no obligation on your part.
To help arrange mortgage financing, some home buyers will work with a mortgage broker. The mortgage broker will recommend the best type of lender and financing for a particular personal financial situation and will facilitate the process. You may want to check that your broker is a member of the Canadian Association of Accredited Mortgage Professionals (CAAMP), and has obtained an Accredited Mortgage Professional (AMP) designation.
One strategy for reducing your mortgage payments is to increase the amortization period. Amortization refers to the period of time over which the entire mortgage is to be paid. Typically, mortgages have been amortized over 25 years, but recently it has become possible to have amortization periods of 30 and 35 years.
Increasing amortization periods translates into smaller payments over a longer period of time, which can be helpful if monthly payments under a shorter amortization period are too high. When choosing an amortization period, keep in mind that it will cost you more in interest to stretch your mortgage over a long period of time. The faster you pay off your mortgage, the more you will save in interest costs.
Another strategy to pay off your mortgage faster and save on interest costs is to alter your payment schedule. In the past, monthly payments were the most popular, but now many buyers are opting for weekly, biweekly, or one of the many accelerated payment alternatives. These options will change the number of times a year you make payments, and although this will not affect the amount you pay, it will result in faster repayment times.
In addition to different amortization periods, there are also numerous different mortgage types and prepayment options. These are listed below:
Variable rate mortgage: Variable rate mortgages carry an interest rate that changes alongside the market rate. Usually, this rate will be below the fixed rate, but carries a greater risk of interest rate hikes. This type of mortgage has fixed payments, whether monthly, bi-weekly or other. If interest rates go down, more of the payment goes to principal and if interest rates go up, more of the payment goes towards the interest.
Fixed rate mortgage: Unlike variable rate mortgages, fixed rate mortgages have a predetermined interest rate that will not change during the term of your mortgage. The advantage of fixed rate mortgages is that they will never change in payment amount, but will often have a higher interest rate than variable rate mortgages.
Capped rate mortgage: Essentially a combination of the above two mortgage types, capped rate mortgages are variable rate mortgages with an upper limit on interest rate hikes. That way, you never have to worry about interest rates spiraling upward during the term of your mortgage. The interest rate is usually somewhere between that of variable rate and fixed rate mortgages.
Your mortgage term is the length of time the interest rate is guaranteed for a mortgage. Mortgage terms normally range from six months to five years or more, after which you can repay the balance of the principal owning or re-negotiate the mortgage at current rates.
Open mortgage: A mortgage which you can pay off, renew, or refinance before maturity, without penalty. The interest rate for an open mortgage is usually higher than a closed mortgage rate, but it provides you with the flexibility to put down additional payments at certain intervals. To benefit from an open mortgage, you should be prepared to put down additional payments from time to time.
Closed mortgage: Typically less flexible than an open mortgage, a closed mortgage has a fixed interest rate and a set term that you cannot change. You cannot pay off a closed mortgage before the agreed end date, although some mortgages will allow you to periodically put money down on the principal. Closed mortgages typically have lower interest rates.