As a newcomer to Canada, the idea of buying a home can bring a mix of curiosity and questions. There are many decisions to make, and understanding the process from the start can help you feel more at ease.
One of the first things to consider is your home mortgage. What types of mortgages are out there, and what is right for your family? By learning about the different options available, you’ll be better prepared to make informed choices. If you have 20% or more of the home’s value for a downpayment, you have an additional option to consider with a TD Home Equity FlexLine[1].
This article will guide you through the basics, explain various mortgage types, and offer helpful tips for a smoother experience.
If you’re looking for guidance on the path to your first home in Canada, our upcoming webinar may be a great place to start. Join us on Thursday, September 18th at 11:00 a.m. EDT for an exclusive live webinar. Sign up here.
Understanding the Basics [2]
What is a Mortgage?
A mortgage is a type of loan that helps you finance the purchase of a home, which you repay gradually over time. The lender provides the money, and in exchange, the home you buy serves as security for the loan. This means that if you default on repaying the loan, the lender can sell the home to repay the amount owing. Each payment you make goes toward repaying both the amount you borrowed (the principal) and the interest.
A mortgage has an amortization period, which is the length of time it would take to pay off the mortgage in full, assuming the same interest rate and payment amount. The amortization period is based on the principal outstanding, interest rate, and the payment amount.
What to Consider When Getting a Mortgage
When selecting a mortgage type, you may wish to consider several factors to ensure it fits your needs. Here are a few:
- Interest rate: This determines how much it’ll cost you to borrow the funds for the term selected. A lower rate typically means lower payments and less interest paid overtime compared to a higher interest rate and over the same period of time.
- Rate type: A fixed rate mortgage[3] keeps your interest rate the same throughout the term, while the rate with a variable rate mortgage[4] can change during the term, which may affect the amount of interest you are charged over the term. Choosing the right type for you depends on your financial situation and comfort with changing rates. Read more about this below.
What You Need to Know About Mortgage Term and Amortization
Understanding the difference between your “mortgage term” and “amortization period” may help you better navigate your mortgage options. Let’s break it down in simple terms.
- Mortgage term: This refers to the length of time you’re committed to a specific interest rate and payment schedule with your lender. Mortgage terms typically range from 1 to 10 years, and at the end of the term, you usually have the ability to renegotiate the rate and payment schedule, pay off the full amount you owe, or switch lenders.
- Amortization period: This is the total period required to fully pay off your mortgage, assuming the rate and payment amount doesn’t change. Most people choose 25 years. A longer amortization period may lower your monthly payments but will result in you paying more interest overall.
It’s also important to consider any potential charges if you decide to break the contract i.e. pay off the mortgage early.
How Mortgage Payments Are Determined
Your mortgage payments are based on several factors including the loan amount, interest rate, amortization period, payment frequency. Payments typically consist of both the principal (the amount you borrowed) and the interest.
Making Your First Mortgage Experience Simpler
Consider Flexible Options
Choosing a mortgage with flexible payment features can help you manage your finances more effectively. For example, TD Mortgages[5] allow you to increase your payments or make lump sum prepayments without prepayment charge. Additionally, you may be able to skip a payment with TD’s approval, under certain conditions, when facing financial challenges. These options can help you pay off your mortgage faster or provide some relief if your financial situation changes.
Finding the Right Mortgage for You
Choosing the right mortgage depends on your current finances and long-term goals. It can be helpful to talk to a mortgage specialist who can guide you through the different options and explain how they may affect your finances.
Mortgage Options in Canada
Variable Rate Mortgage[4]
A variable rate mortgage has an interest rate that can change during the term of the loan, depending on the fluctuations of the base rate set by the lender. Variable rate mortgages typically offer fewer term length options compared to fixed rate mortgages.
Advantages:
- At TD, if interest rates decrease, you will pay less in interest, and you might be able to pay off your mortgage quicker.
Disadvantages:
- At TD, if interests rates increase, you will pay more interest, and it may take you longer to pay off your mortgage.
Fixed Rate Mortgage [3]
A fixed-rate mortgage keeps the interest rate the same for the entire mortgage You can choose from a variety of term lengths, typically ranging from 6 months to 10 years (term lengths may vary by lender).
Advantages:
- Consistent payments throughout the term, providing stability and ease of budgeting.
- Protection from rising interest rates.
Disadvantages:
- At TD, if interest rates drop during your term, the customer rate remains the same during the term.
- Your mortgage payments do not decrease, unless you renegotiate your mortgage.
How Your Mortgage Decisions May Shape the Future
The mortgage decisions you make today can have a lasting impact on your financial future. Mortgage features can offer flexibility if your circumstances change later on. For example, you might have the option to choose between an open or closed prepayment term. It’s a good idea to consult with a mortgage specialist to help you choose the best options for your future needs.
Exploring Prepayment Options
One choice you’ll need to make is whether to go with an open or closed prepayment option. The main difference is the amount of extra payments you can make or pay off your mortgage early without charge, which can help reduce the total interest you pay overtime.
Let’s make it easy. Here’s a quick breakdown of open and closed options to help simplify your decision-making[2]:
Open Mortgage: This option gives you the flexibility to make additional payments or pay off your mortgage at any time without facing extra charges.
- Benefits: No prepayment charges.
- Drawbacks: Typically comes with a higher interest rate than a closed mortgage of the same term length due to the added flexibility. Fewer term length options are available compared to closed mortgages.
Closed Mortgage: With a closed mortgage, you’re limited in the amount of prepayment you can make without charge, and this limit varies by lender.
- Benefits: Generally, offers a lower interest rate than an open mortgage with the same term length.
- Drawbacks: Less flexibility in making extra payments, with charges if you exceed the allowed prepayment limits.
Mortgage Features When You Sell Your Home[6]
Portable Mortgages: With a portable mortgage, you can apply to transfer your existing mortgage to a new property while keeping the same interest rate and terms. This option can be helpful if you have a favourable rate, though you’ll need to requalify for the mortgage. There are additional conditions if you need more money.
Assumable Mortgages: An assumable mortgage lets the buyer take over your current mortgage. While not all lenders offer this, those that do may have conditions, such as approving the buyer who wants to assume the mortgage. Be aware that in certain situations, the seller may still be liable for the mortgage after the property is sold.
Understanding your mortgage options can help you make the right choice for your future. Take the time to learn more and speak with a mortgage specialist so you can feel ready and confident as you work towards financing your home in Canada.