What is a Mortgage?
September 5, 2023 | Posted by: Sherry Corbitt
A mortgage is a loan offered by a lender to obtain the asset of a property and land. Did you know roughly every 9 in 10 homeowners between the ages of 25 to 44 have a mortgage? With this many Canadians securing a loan for their homes, it's important for homeowners to understand what makes up their mortgage. This article provides an overview and will help you make an educated decision to get a mortgage that best suits your needs!
Insured vs Uninsured:
If buyers require mortgage insurance is dependent on the size of the down payment. Buyers with a downpayment between 5% and 19% will require Housing Corporation (CMHC) insurance. This is known as a high ratio mortgage, which CMHC insurance protects the lender's investment if owners can not sustain their mortgage payments and go into foreclosure. Alternatively, buyers with a conventional mortgage that have a downpayment of 20% or higher do not require this mandatory mortgage insurance.
Whether or not CHMC insurance is required, buyers also have the option to acquire optional mortgage insurance. This will protect buyers if they suddenly lose income or are unable to work and will cover the mortgage payments for an agreed time frame. This insurance is available for most buyers, however, some may be ineligible.
In today's market, we are currently seeing buyers can secure a lower interest rate by locking into a fixed mortgage rate. This means regardless of the rate changes implemented by the government of Canada, the homeowner's mortgage rate will stay the same over their term. (The mortgage term is the duration the buyers and lender agree to payment conditions and the selected rate. Usually between 2-5 years). A benefit of having a fixed rate is the consistency of payments, which financial burden does not increase if the rates increase. My brokerage has recommended buyers take a fixed rate with a shorter term, as I predict the rates will hopefully begin to fall by the end of this year!
Buyers also have the option to secure a mortgage with a variable interest rate. This rate is subject to change based on the Government of Canada. Through 2022, Canada saw the rates continually increase, however as of March 2023, it has hopefully reached the peak and has remained the same. In today's market, it does not align with the majority of buyers' financial goals to take a variable mortgage, however, this may soon change! Once inflation begins to come down, we will also see the rates gradually decrease. If buyers are comfortable with the potential fluctuating payments, this may become a viable mortgage option.
Most lenders when offering a mortgage loan offer “closed” prepayment options. This means buyers are eligible to make additional payments to decrease their mortgage, however, will be given a yearly limit contribution. This amount varies for each lender, although usually still allows a significant amount. Having a closed mortgage is not a concern for most homeowners as they do not plan to obtain a large influx of cash. Although, some lenders do offer “open” mortgages which allow buyers to pay off the loan at any time.
Overall, mortgage insurance, interest, and prepayment options are all important components of a mortgage. If you have any questions regarding your current mortgage, or what type of mortgage will suit your financial needs please reach out to my team!
Your Broker for Life,