Mortgages 101: Mortgage Basics for Home Buyers
Get to know these basic concepts, which may help you when you’re looking for, or making decisions on a mortgage.
When you are making a home purchase, you’ll need a mortgage (a loan) and a mortgage down payment, which is the money you pay up front to obtain a mortgage. At minimum, you must provide at least 5% of the purchase price of the house.
If you have a down payment that is less than 20% you may get a high ratio (or insurable) mortgage. It requires purchase of default mortgage insurance to protect the lender from any losses in the event of default on the loan. When you provide a down payment that is more than 20% you may get a conventional (or uninsurable) mortgage, which doesn’t require default mortgage insurance.
When you get a mortgage, you could opt for an open mortgage, which is a mortgage that can be prepaid at any time prior to maturity, without penalty. Or, you may choose a closed mortgage, which is a mortgage that cannot be prepaid, renegotiated or refinanced prior to maturity without penalty. Some lenders may offer prepayment privileges, allowing you to make extra payments to pay down your mortgage faster without penalty.
Additionally, you can choose between fixed rate mortgages or variable rate mortgages. Fixed rate mortgages charge the same interest rate throughout the length of the mortgage contract, while variable rate mortgages charge an interest rate that may fluctuate over time based on market conditions. Both fixed and variable rate mortgages are influenced by the prime (lending) rate. This is the annual interest rate Canada’s major banks and financial institutions use to set interest rates for variable loans and lines of credit, including variable-rate mortgages.
Contact a mortgage broker for help
Need extra help? A mortgage broker is a licensed professional who provides a wide range of mortgage products to their clients. In most cases, the mortgage broker is paid a referral fee by the lender, not by their client. Lending institutions will usually provide their best interest rates to the broker ensuring that, as the home buyer, you don’t have to negotiate to get the best rate.
Visit MCAP.com and use the free Find a Broker tool to find a mortgage broker in your area.