9 Useful Facts about House Mortgage

1. Amortization Period

It is not always better to choose the longest amortization period on your mortgage. Although the payments will be lower with a longer amortization period, you will end up paying more in interest over the life of your mortgage. The following example shows this for a $250,000 mortgage with a 5% interest rate.

Amortization period Monthly payment Total interest over the lifetime of the mortgage
30 years $1,334 $230,322
25 years $1,454 $186,204
20 years $1,643 $144,275
Amount saved with a shorter amortization period $86,047

2. Minimum Down Payment 5%

Useful Facts about Home MortgageIn order to buy a home, you need a minimum down payment of 5 per cent of the purchase price (or appraised value) of the home. To purchase a house, the minimum down payment that is usually required is 5 per cent of the property lending value (which is equivalent to the accepted purchase price or appraised value, whichever is lower). However, some financial institutions may offer to finance your down payment. If you choose this option, you will increase your debt and pay more interest over the lifetime of your mortgage. In addition, the required mortgage default insurance premium will also be higher than if the down payment came out of your own funds.

3. High-Ratio Mortgage vs Conventional Mortgage

You need at least 20 per cent down payment, so that your mortgage does not need to be insured by CMHC (Canadian Mortgage Housing Corporation) or by an approved private insurer.

If you have less than a 20 per cent down payment, your mortgage is called a high ratio mortgage and must normally be insured by the Canada Mortgage and Housing Corporation (CMHC), or through an approved private insurer. You must pay an insurance premium that ranges between 0.5 and 2.9 per cent of the amount lent to you, depending on the value of the home and the down payment you are able to make. With this mortgage default insurance, the lender is protected if at some point in the future you cannot make your mortgage payments.

Mortgage default insurance (sometimes called mortgage loan insurance) protects the mortgage lender in case you are not able to make your mortgage payments. It does not protect you. You must pay mortgage default insurance if your down payment is less than 20% of the purchase price of your home. This is called a high-ratio mortgage. If you can put at least 20% of the purchase price of your home as a down payment, you will have what is called a conventional mortgage. In this case, mortgage default insurance is generally not required. There are exceptions to this, for example in the situations where your salary is not paid on a regular basis.

4. Shop Around for Best Mortgage Rate

Shopping around for a mortgage involves more than just comparing rates in the local newspaper. Your local newspaper (or the Internet) lists current posted rates of various mortgage lenders. Posted rates give you an idea of what the lender can offer you. Depending on your credit rating and your relationship with the institution, you may be able to negotiate a better rate than the posted rate (up to a 1 per cent discount off the posted rate, or better). It is therefore important to use posted rates only as a first step and to contact several lenders to negotiate a better rate than the one posted. You can also inquire at mortgage brokers, who can shop around for you to find the best rate and the best terms for your mortgage needs. Before agreeing to use a broker, verify if there are any fees or long-term commitments.

5. Payment Frequency – Monthly vs Bi-weekly

Making your mortgage payment every two weeks (with an accelerated bi-weekly payment, which is equivalent to half the monthly payment) means that you pay your mortgage off faster, because when you pay every two weeks, you make (52 weeks in a year ÷ 2 =) 26 payments, or the equivalent of one extra monthly payment per year. The following example shows that for a $100,000 mortgage with a 6 per cent interest rate and a 25-year amortization period, you can pay off your mortgage approximately four years faster.

Frequency of payments Payment Number of payments made during year Amount paid off in one year Number of years to pay off mortgage
Monthly $639.81 12 12 × $639.81 = $7,677.72 25
Accelerated bi-weekly (every 2 weeks) $319.90 26 26 × $319.90 = $8,317.40 20.89

Switching from a monthly mortgage payment to an accelerated bi-weekly mortgage payment has an effect that’s similar to reducing the amortization on your mortgage.

When you reduce the amortization on your mortgage, you increase the amount of your payment, but you also reduce the total amount of interest charges you will pay over your mortgage term. By making a larger mortgage payment, you can pay your mortgage off faster. When you switch from a monthly payment to an accelerated bi-weekly payment, you effectively make the equivalent of one extra monthly payment per year. This allows you to pay your mortgage off faster, similar to reducing your amortization period.

6. Interest Rate Change

When you apply for a mortgage at a federally-regulated mortgage lender, the mortgage issuer must, by law, indicate the amount you will pay in interest charges during the term of the mortgage.

The Cost of Borrowing Regulations that the FCAC oversees states that when you apply for a mortgage, a federally-regulated mortgage lender must indicate, in your mortgage agreement or contract, how much you will pay in interest charges over the term of the mortgage.

7. Variable Rate Mortgage Payment

When you choose a variable-rate mortgage, your mortgage payment is fixed, even though the interest rate on your mortgage fluctuates. When interest rates are low, a larger portion of your mortgage payment will go towards paying your principal. When interest rates are high, a larger potion of your mortgage payment will go towards paying interest charges.

8. Mortgage Penalty

If your agreement allows you to pay off or renegotiate your mortgage early, you will normally have to pay a penalty.

If you initially received a discounted rate, the financial institution may apply this discount to the current mortgage rate. On the other hand, if you received a “cash back” instead of a discounted rate, the financial institution may ask you to reimburse a portion (or all) of the “cash back” initially received.

Some financial institutions may also add an administration fee for paying off or renegotiating your mortgage early. This fee may be paid by the institution to which you are transferring your mortgage.

The penalty is generally the greater of:

  1. three month's interest on your current mortgage, calculated as follows:

    A \times \frac{B}{\text{12 months in a year}} \times \text{3 months}

    • A is the outstanding amount on your mortgage
    • B is the annual interest rate on your mortgage
  2. OR

  3. the interest rate differential, which for simplicity can be estimated by using the following formula:

    A \times \frac{B - C}{\text{12 months in a year}} \times D

    • A is the outstanding amount on your mortgage
    • B is the annual interest rate on your mortgage
    • C is the current mortgage rate for a term similar to what is left on your existing mortgage
    • D is the number of months left to the end of your term

9. Term of Mortgage

Term of a mortgage is not the same as amortization period. The term of mortgage is the length of time covered by a mortgage agreement. The most common term is 5 years. The amortization period, however, is longer (usually 25 years) and represents the length of time it takes to pay off the entire amount lent to you.

Tags: , , , , , , , , , , , , ,

Leave a Reply

Feature Story

How Much Do First Nations Chiefs Make Annually across Canada?

Chief Ron Giesbrecht in BC took home almost $1,000,000 INCOME TAX FREE! His band has a population of only 82!!! Chief Jim Boucher in Alberta claimed an annual salary of...

Read more »

Top Financial Stories

How Much Do Tim Hortons Owners Earn Annually?

Tim Hortons store owner pockets each year: $265,558 and more (after tax & interest)!!! In year 2002 for an average Tim Horton's outlet: Gross earning: $1.5Million...

Read more »