Residential Mortgage ABC’s

I hope that everyone’s had a great week. I’ve decided tofocus this week’s column on a couple mortgage basics. I often hear thatterminology and mortgage options are not properly discussed at the bank.Hopefully this helps...

Interest rate: isthe rate of return a lender receives for permitting you (the borrower) for aspecified term (or duration). 

Term: when yousign for a new mortgage you can usually choose the duration of your term (1, 2,3, 4, 5 years or more). If you decide to sell or refinance within your term youcan usually expect to pay a penalty to the bank. Upon completing your term, youare permitted to refinance or change banks without penalty. 

Fixed and variable: Fixedrates remain set throughout your mortgage term. Variable rate mortgages arealso set to a term but fluctuate based on the Bank of Canada. Choosing betweeneither is based on your personal risk tolerance and you must qualify. 

Amortization period:is the number of years it takes to pay back your mortgage. Maximum amortizationis currently 30 years but some lenders still offer 35 years but you need toqualify.   

Frequency:  refers to frequency of your mortgage paymentsuch as weekly, accelerate bi-weekly, and monthly. What frequency you choose isimportant as it help pay your mortgage down quicker.

Closed versus an openmortgage: If you are looking to buy a property and “flip-it” within 2-3months then an open mortgage may be what you’re looking for.  The rate is higher but you can break yourmortgage at any time without penalty. A closed mortgage is exactly how itsounds closed for the duration of your term and there are generally penaltiesfor breaking it.

Cash back: A cashback mortgage is great if you’re a first time buying and need a little helpwith your down payment.  If you have goodcredit then you could qualify to get up to 5% cash back to supplement yourexisting down payment.  Make sure youwill keep your home for your term otherwise you will have two penalties, themortgage penalty and you will also be expected to repay the cash backportion.  

Secured line ofcredit: is a line of credit attached to your home which is based on thesame principles as a variable mortgage. I would suggest that you use it as a short to medium term financial toolbecause the closer you get to your limit the more it could affect your creditscore. Lines of credit compound monthly.

If you have any specific questions or good and badexperiences you’d like to share please feel free to contact me.