Mortgage Information

The Down payment

The down payment is the money you put down toward the purchase price of a home – The larger the down payment, the less your home will cost you in the long term. At the same time, it is important to be realistic about exactly how much you can afford as a down payment. Think long-term when making this decision.

Making your Purchase More Affordable

There are different options available depending on how much of a down payment you can afford:

  • Conventional mortgage or (20% down payment)
  • Low down payment mortgage (minimum 5% down)
  • Low down payment mortgages require mortgage default insurance. The premium can either be paid up front or added to the amount you borrow. Under the federal government’s Home Buyer’s Plan, first-time homebuyers are eligible to use up to $25,000 in RRSP savings per person ($50,000 for couples) for a down payment on a home. The withdrawal is not taxable as long as you repay it within a 15-year period. To qualify, the RRSP funds you plan to use must have been in your RRSP for at least90 days.

The Mortgage Payment Schedule

When most people think of their mortgage payments, they think in terms of monthly installments. However weekly or bi-weekly mortgage payments have been growing in popularity with home owners across Canada, and many institutions now offer these payment options. However, making weekly or bi-weekly (where you make a half-payment every two weeks) payments will save you money. With bi-weekly payments, for instance, you will make two more half payments per year towards your mortgage. This might not seem like much, but it does add up. The end result is you pay off your mortgage sooner and you save money.

A second reason why making weekly or bi-weekly payments can be advantageous has to do with employment income. If you receive your income on a weekly or bi-weekly schedule, then your budget can be simplified if you similarly schedule your mortgage payments.

Mortgage Payment Plans

Privilege payment options are an essential component of a mortgage; they can lead to big savings and thus they are a very important aspect to any mortgage. These payment options allow the mortgage holder to make lump sum payments, usually on an annual basis. Exactly how these payments can be made and when vary widely across financial institutions, so it is important to understand your mortgage specifics. A privilege payment of 10%, for example, means you can pay off 10% of your mortgage per year, in addition to your regular mortgage payments. In general, the more flexibility in this payment option, the better. Even just paying off an extra $1000 a year will shave off a lot of interest over the lifetime of the loan.

Fixed versus Variable Interest Rates: What’s Better

Choosing between a fixed or variable rate mortgage is not a simple decision, which is why many people are looking for advice to help them decide which mortgage interest type is best for them based on their personal circumstances.

You can choose to go with a stable, fixed rate mortgage. Or, you may feel more comfortable with the risks and potential rewards of a variable rate mortgage. For the “best of both worlds,” you might decide on a mortgage that combines both interest types. It really depends on your tolerance for risk, as well as your current goals and the life stage you are in.

Here is some information about each option to help you make the right choice.

The case for fixed rate:

Fixed rate mortgages are chosen because of the high level of stability they provide. A fixed rate mortgage offers the security of locking in your interest rate for the term of your mortgage. This means you’ll know exactly how much principal and interest you will be paying on each regular mortgage payment throughout the term you select. The main advantage of selecting a mortgage with a fixed interest rate is that you can depend on an interest rate that stays the same during the term of the mortgage. The down side is that you can’t take advantage of a lower interest rate — and the ability to have more of your payment go towards the principal and less to interest — if interest rates drop during the term of your mortgage.

The case for variable rates:

Many Canadians shy away from the option of a variable rate mortgage because of the potential risk of rate increases. However, while there is always a risk of interest rate fluctuations, this concern may be less of a factor than you may think, and there are other reasons to consider a variable rate mortgage. Many Canadian economic experts believe that a mortgage rate that varies with fluctuations in the bank’s prime rate will offer the greatest advantage when it comes to long-term savings on interest costs. Examining Canadian mortgage rate data from 1950 – 2007, Dr. Moshe Milevsky, Associate Professor of Finance at York University, found: Choosing a variable rate mortgage would have saved Canadians $20,000 in interest payments over 15 years (based on a $100,000 mortgage); and Canadians would have been better off with a variable rate mortgage compared to a five-year fixed rate 89% of the time1. With a variable rate mortgage Regular mortgage payments are set for the term, even though interest rates may fluctuate during that time. When rates go down, an increased amount of your payment goes to pay the principal. With more going into your principal, the less interest you pay, and the faster the mortgage is paid off. When rates go up, you’ll see an increase in the portion of payment that goes into paying the interest. With less going into the principal, the amortization period is extended. Typically, variable rates include some of the lowest rates available. Variable rates offer you the freedom to convert any time to a fixed rate mortgage with a term that’s at least as long as the one remaining on the mortgage.