Whether you’re a first-time home buyer, or just need some extra guidance on mortgage basics, the following topics can help you make a well-informed decision.
Down Payment Options
From a low down payment mortgage to using your Registered Retirement Savings Plan (RRSP) as a source of funds, buying a home has never been easier.
A conventional mortgage requires a down payment of at least 20% and is offered on either a fixed or variable interest rate basis. Conventional mortgages have the lowest carrying costs because they do not have to be insured against default.
Low Down Payment Insured Mortgage
Most lenders now offer insured mortgages for both new and resale homes with lower down payment requirements than conventional mortgages – as low as 5%. Low down payment mortgages must be insured to cover potential default of payment; as a result, their carrying costs are higher than a conventional mortgage because they include the insurance premium.
Using Your RRSP as a Down Payment
Under the federal government’s Home Buyers Plan, first-time home buyers 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 least 90 days.
Closed, Convertible & Open Mortgages
Can’t decide between a closed, open or convertible mortgage? There are many factors to consider such as your financial goals and how soon you want to pay off your mortgage.
Closed term mortgages are usually the better choice if you’re not planning to pay off your mortgage in the short term. Interest rates for closed term mortgages are generally lower than for open term mortgages. Closed term mortgages offer you the ability to save on interest costs and payoff your mortgage faster. You will pay a prepayment charge if you wish to renegotiate your interest rate or pay off your mortgage balance prior to the end of its term.
Convertible Closed Mortgage
A convertible mortgage gives you the same benefits as a closed mortgage, but can be converted to a longer, closed term at any time without prepayment charges.
Open term mortgages may be appealing if you are planning to pay off your mortgage in the near future. They can be repaid either in part or in full at any time without prepayment charges. Open mortgages can be converted to any other term, at any time, without a prepayment charge. Interest rates for open mortgages are generally higher than for closed mortgages because of the added pre-payment flexibility.
Mortgage Rates: Fixed and Variable
From the security of a fixed rate mortgage to the flexibility of a variable rate mortgage, you have several choices when it comes to interest rates.
Fixed Rate Mortgage
The interest rate for a fixed rate mortgage is locked in for the full term of the mortgage. Payments are set in advance for the term, providing you with the security of knowing precisely how much your payments will be throughout the entire term. Fixed rate mortgages can be open (may be paid off at any time without breakage costs) or closed (breakage costs apply if paid off prior to maturity).
Variable Rate Mortgage
With a variable rate mortgage, mortgage payments are set for the term, even though interest rates may fluctuate during that time. If interest rates go down, more of the payment is applied to reduce the principal; if rates go up, more of the payment is applied to payment of interest. Variable rate mortgages may be open or closed.
A variable rate mortgage provides you with the flexibility to take advantage of falling interest rates and to convert to a fixed rate mortgage at any time.
Amortization – Longer or Shorter
Choosing the length of your amortization period, which means the number of years you will need to pay off your mortgage, is an important decision that can affect how much interest you pay over the life of your mortgage.
Historically, the standard amortization period has been 25 years. However, shorter (10 or 15 years) and longer (up to 35 years) time frames are also available.
A shorter amortization saves you money as you will pay less in interest costs over the life of your mortgage. Your regular mortgage payment amount would be higher than if you had selected a longer amortization, as more of your payment goes towards paying down your principal balance. However, the benefits are that you build the equity in your home faster and are mortgage free sooner.
A longer amortization provides you lower monthly payments and because of this it is appealing to many people. However, it does mean that more interest will be paid over the life of the mortgage and you will build the equity in your home at a slower pace.
Courtesy of RBCRoyalBank.com