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What is mortgage?
In the simplest form, a mortgage is a loan used to purchase a home or property. Like other loans, mortgages come with interest rates, amortization (repayment) schedules and other terms. There is a mortgage, and the house itself is used to obtain a loan. This means that if the mortgage holder fails to make a payment, the home can be taken back.
Before applying for a mortgage, please be familiar with the following concepts. This will help ensure you get the right mortgage for you:
- semester: The time when your mortgage contract takes effect. Terms range from six months to five years or more.
- Amortization: Total time it takes to pay off the mortgage. Most mortgages have amortization period of 5 to 25 years. Some buyers are eligible for a 30-year mortgage. Buyers usually complete several mortgage terms before fully repaying the loan.
- interest rate: The amount of interest you will pay on the mortgage loan. The interest paid is included in your regular mortgage; another portion of the payment repays the principal borrowed.
- Open or close mortgage loans: refers to the level of flexibility of your mortgage repayment terms. If you want to be able to renegotiate, refinancing or even repay outside the original terms, you need to open up your mortgage. Closed mortgages do not allow flexibility. However, it usually has a lower interest rate.
- Fixed and variable rates: At a fixed interest rate, the mortgage remains unchanged throughout the term. Interest rates may fluctuate as market conditions change.
Fixed and variable mortgage rates
When applying for a mortgage, Canadian home buyers can choose between fixed or variable interest rates. The type of interest rate will affect the total interest paid during the mortgage repayment period. It will also determine whether your interest rate remains the same (“fixed”) or that it is likely to change during your mortgage period. To help you understand the differences, let’s compare five-year fixed and five-year variable mortgage rates.
- Five-year fixed mortgage rate: The interest rate has been locked for five years, which means you can predict how much mortgage payments will be during the contract period. Although more predictable than variable rates, fixed rates may be higher.
- Five-year variable mortgage rates: These mortgages also have five-year terms. However, unlike fixed-rate mortgages, the rates charged may change during the contract period. Depending on your mortgage terms, periodic payments may change or may remain the same as interest rates rise or fall.
The best mortgages available today
Here are some of the best fixed and variable mortgages available in Canada right now. To compare rate types and terms, click the filter icon next to the down payment percentage.
Lender and mortgage broker
Some first-time home buyers choose to go directly to their bank mortgages because they are familiar with financial institutions and are already doing business there. There is nothing wrong with this approach – so to speak, some people or couples like to keep all their financial relationships under one roof. However, if you can save you money by comparing rates online and/or working with a broker, you definitely have more options. A mortgage broker is a professional who will leverage the lender network and help you find the best mortgage for your needs.
“Going to a bank means your only option is a lender, but going to a broker allows you to get multiple lenders,” Parton said, including multiple banks and credit unions. She added that some financial institutions provide services to niche populations, such as new Canadians or self-employed people, brokers may be able to help you find someone for you.
How much mortgage can I afford?
Once you have a substantial down payment on hand, the next step is to figure out how much mortgage you can afford, which is the amount you pay interest to the lender. A mortgage is calculated as the total cost of your home, minus the down payment.
When you apply for a mortgage, your lender will look at your total debt service (GDS) ratio and total debt service (TDS) ratio to determine how much mortgage a person with debt and income levels can reasonably bear.
Watch: What is mortgage affordability?
These numbers are essentially a test of your income related to debt and expected housing expenses, and they will affect the amount of mortgage you provide. TDS equals the expenses of your new home (i.e., your mortgage, heating bill, taxes, and any applicable condo expenses) divided by your total household income. GDS is a combination of these same housing expenses, as well as your existing debt payments (such as car loans and revolving lines of credit), unless your household’s total income.
National Housing Agency, Canadian Mortgage and Housing Company (CMHC), considers a home to be affordable if your GDS and TDS are within the limits of 39% and 44% respectively. The Canadian Financial Consumption Agency said that your GDS and TD cannot exceed 32% and 40% respectively.
