What options do I need to consider when arranging a
mortgage?
Rate of Interest
Interest is the cost of borrowing money and is paid
to the lender. Mortgage interest rates are affected
by the prevailing market interest rates. Mortgage rates
are either fixed or variable.
A fixed rate is locked in so that it will not
rise for the term of the mortgage.
A variable rate will fluctuate. The rate is
set each month by the lender, based on the prevailing
market rates. Your monthly payment is fixed to be the
same each month for the term of the loan, but the percentage
of each payment that goes toward the interest, and the
percentage that pays down the principal, changes.
A variable rate can be a good choice if rates are high
when you arrange your mortgage and then fall afterwards.
But if rates rise, you may want to convert to a fixed
rate. Bear in mind that this can cost you a cash payment
penalty.
If you select a variable rate, your lender may restrict
the mortgage amount to 70% of the purchase price of
the home and require a higher down payment on either
a conventional or a high-ratio mortgage.
Also, some lenders offer a protected or "capped"
variable rate. This means your interest rate will not
rise above a predetermined limit. However, you usually
pay a premium for this protection.
Term
The term of the mortgage is the length of time that
certain factors, such as the interest rate you pay,
are set at a negotiated level.
Terms usually last anywhere from six months to 10 years.
At the end of the term you either pay off your mortgage
or renew it, possibly renegotiating its terms and conditions.
Generally, the longer the term the higher the interest
rate. Many experts suggest you select a long term if
interest rates are rising. If rates are falling, you
may want to select a short term and then lock in the
rate when you think rates won't go any lower. Note that
the term is not the amortization period.
Amortization
This is the amount of time over which the entire debt
will be repaid. Most mortgages are amortized over 15,
20 or 25 year periods. The longer the amortization,
the lower your scheduled mortgage payments, but the
more interest you pay in the long run.
Schedule of Payments
A mortgage loan is repaid in regular payments, either
monthly, biweekly or weekly. The more frequent payment
schedule can save you money by increasing the amount
paid toward the total mortgage each year.
The more frequent your payments in a year, the lower
the overall interest you pay on your mortgage.
Open Mortgage
This means you can repay the loan, in part or in full,
at any time without penalty. Interest rates are usually
higher on this type of loan.
An open mortgage can be a good choice if you plan to
sell your home in the near future. Most lenders will
allow you to convert to a closed mortgage at any time.
Many experts suggest taking an open mortgage for a
short term in times of high rates and converting to
a longer time when rates fall.
Closed Mortgage
A closed mortgage usually offers the lowest interest
rate available. It's a good choice if you'd like to
have a fixed rate to work your budget around for a few
years. However, closed mortgages are not flexible and
there are often penalties or restrictive conditions
attached to prepayments or additional lump sum payments.
It may not be the best choice if you might move before
the end of the term.
Portable Mortgage
Many financial instituions offer mortgage "portability".
This means that you can transfer your mortgage from
one property to another, if you sell your home and buy
another, without incurring any penalties or legal fees
for a mortgage discharge and renewal.
When you are negotiating with your mortgage broker
or financial institution, ask if the mortgage they are
offering is portable. If so, it can give you flexibility
and save you money.
