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Your passport to Home Ownership

A mortgage is, in simple terms, a loan that you take to buy a home. The loan is secured by the property value and your ability to repay the loan. It is important that you calculate what you can afford to establish your price range. The amount borrowed is called principal, and the cost of borrowing the money is called interest. The borrower is the mortgagor, and the lender is the mortgagee.

Conventional Mortgages: Under a conventional mortgage, a lender will normally provide up to 80% with no CMHC premiums of the appraised value or purchase price of a property, whichever is less. You must be able to provide at least 20% of the financing on your own.

Example: Purchase Price: $300,000
  Conventional Mortgage: $240,000
  Required Down Payment: $ 60,000

High Ratio or Insured Mortgage: A high ratio mortgage finances a higher percentage - up to 95%- of the appraised value or purchase price of the property, whichever is less. This type of mortgage must, by law, be insured against non-payment by either the Canada Mortgage and Housing Corporation (CMHC) or the Mortgage Insurance Company of Canada (MICC).

Example: Purchase Price: $300,000
  Down Payment Available: $ 10,000 

Mortgage insurance protects the lender against loss if the borrower fails to meet the repayment terms. The application fee (approximately $75) and insurance premium (approximately 0.5% to 2.5% of the loan) are paid by the borrower. The higher the ratio of mortgage to down payment, the higher the cost of insurance. Mortgage insurance may be subject to provincial sales tax.

YOUR DOWN PAYMENT

A minimum cash down payment from your own resources is required because mortgage lenders won't advance the entire purchase price of a property. Your minimum down payment would normally be 10%, however, a recent government program allows first time buyers to use funds from their RRSP for their down payment. Ask us for details regarding other government programs.

It's to your advantage to aim for a down payment of 20% or more, so you'll qualify for a conventional mortgage and avoid paying the mortgage insurance premium. The larger your down payment, the easier it will be to arrange a mortgage and carry it comfortably.

CHOOSING AN AMORTIZATION PERIOD

Once you're settled on the type of mortgage that fits your financial circumstance, you're ready to start considering the various options available. Amortization refers to the number of years it will take to repay the loan in full - most commonly 25 years. Longer amortization periods result in lower payments, but increase the total amount of interest paid. If you can handle a shorter amortization period, you'll achieve tremendous savings on the interest cost of your mortgage and live mortgage free sooner!

Each mortgage payments consists of interest plus repayment of part of the principal. In the early years of a mortgage, a higher portion of your payment is used to pay interest. By the time you reach the last years of your mortgage, almost all of your payment will be applied against the principal.

Example: If you have a $100,000 mortgage with 8% interest

Amortization
Period
Monthly
Payment
Total of
Payments
Total
Interest Paid
Interest
Savings
25 years $ 763.21 $228,963 $128,966 ----------
20 years $ 828.36 $198,806 $ 98,805 $30,161
15 years $ 948.15 $170,667 $ 70,668 $58,298
10 years $1206.41 $144,769 $ 44,769 $84,197
Assuming constant interest rate for entire amortization period. Payment consists of principal and interest.

DECIDING ON A TERM

The length of time for which the interest rate is fixed is called the term. Most mortgages have terms of six months to five years.

Open versus Closed Terms

An open mortgage is one which allows payment of the principal, in part or in full, at any time without penalty. Open mortgages tend to be for a short term - usually six months or one year. Since open mortgages offer greater flexibility than closed mortgages, they usually have a higher interest rate.

A closed mortgage requires you to maintain a specific payment schedule. A penalty usually applies if you repay the loan in full before the end of the term.

A convertible mortgage allows you to renew your mortgage at any time without penalty for a longer term, closed mortgage.

Short versus long terms

When interest rates are either high or falling, there's a tendency to choose a shorter term mortgage. This strategy pays off if you can renew at a lower rate six months or one year later.

You may want to consider a longer term mortgage if interest rates are rising, or if you want to keep your mortgage payments the same for a few years.

The effects of interest rates on the term

As a rule, you'll find interest rates rise with the length of the term. The lowest interest rates are usually associated with six - month and one - year mortgages. Higher interest rates mean higher mortgage payments.


Example: If you have a $100,000 mortgage and 25 year amortization

Interest
Rate
Monthly
Payment
Total Amount
Repaid
Total Interest
Paid
6% $639.81 $191,943 $ 91,943
7% $700.42 $210,126 $110,126
8% $763.21 $228,963 $128,963
9% $827.98 $248,394 $148,394
Assumes constant interest rate for the entire amortization period. Payment consists of principal and interest.

PAYMENT OPTIONS

The three most common payment frequencies are monthly, bi-weekly and weekly. increasing the frequency of your payments can allow you to pay off your mortgage sooner and reduce the total amount of interest paid.

You should select a payment frequency based on what's convenient for you. You may want to match your payments to your pay periods. If your goal is to pay off your mortgage quickly, consider accelerated weekly, or bi-weekly payment plans. You'll make the equivalent of 13 monthly payments each year, rather than 12, and realize significant interest savings. Other options are to choose a shorter amortization period or take advantage of prepayment privileges.

PREPAYMENT PRIVILEGES

Prepayment privileges are voluntary payments in addition to your regular mortgage payments. The money is applied directly against the principal owing, so you'll pay off your mortgage more quickly. You'll also significantly reduce the total amount of interest you would otherwise have paid. Some examples of possible options available:

  1. You can increase your regular principal and interest mortgage payment by as much as 100 per cent.
  2. You can pay up to 15 per cent of the original principal balance in a lump-sum once annually.
MORTGAGE BROKERS

We recommend you contact one of our preferred "mobile" mortgage specialists. They will come to your home or office and pre-qualify you free of charge.

Adriana Romeo

(416) 561-7311 Email adriana.romeo@rbc.com

Sonia Caceres (Bilingual Spanish)

(416) 999-7854 Email soniac@cogeco.ca

Ready When You Are!

12612 Highway 50, Unit 1, Bolton, Ontario L7E 1T6, Canada
Toll Free: 1-800-748-6789 Fax: 905-857-4566 Email: info@RealEstateInCaledon.com