What do I need to consider when getting a mortgage in BC?
Amortization: This is the life of your mortgage. Making regular payments, this is how many years it will take to pay off your Vancouver mortgage. The maximum amortization is currently 35 years, however effective March 18th, 2011, the maximum amortization will be 30 years.
Term: The term is length of your mortgage agreement. This is the period of time you & the bank agree to a specific rate, payment (fluctuates with variable) & options. Unless you are planning on moving or selling in under 5 years, most people choose 5 years.
Down Payment: The amount of equity you put into the property at the time of purchase. Currently, the minimum down payment is 5%. For down payments between 5-20%, you are required to purchase mortgage insurance (see below).
Mortgage Insurance (aka: CMHC): Mortgage insurance is required for down payments between 5-20% or amortizations longer than 25 years. View the premiums here.
Options: Mortgage options are just as important when financing Vancouver real estate as having a competitive rate. In many cases, having the right options can save you much more than having the lowest rate. Elements such as lump-sum payments, increased payments, double up payments, etc. are the tools that enable you to become mortgage free, faster.
Types of Mortgages
Mortgages are complex products. Rate, term & amortization are the basic ingredients but that's really just one page of the cookbook. Consider the following choices when choosing your mortgage:
Fixed Rate vs. Variable Rate
With a fixed rate mortgage, your interest rate & payment remain the same for the length of your term. A variable rate mortgage, on the other hand, is tied to the bank's prime rate & fluctuates throughout the term. Historically, variable rate mortgages have been a less expensive option than fixed rate mortgages, but this comes with the added risk of your payment changing down the road.
The decision of whether to go fixed or variable boils down to your risk tolerance. Are you able to handle a possible increase in payments if interest rates go up? Is having the security of knowing your payment each month worth sacrificing the potential savings of a variable? Choosing the right product is a client-specific process. For more information on fixed vs. variable, or to see which is right for you, contact Derek.
Short-term vs. Long-term
Choosing the appropriate term is just as important as getting a competitive rate. Why? Breaking your mortgage before the end of term can come with a hefty price tag. If you plan to sell your home in the near future or if you feel interest rates will be lower at the time of renewal, a short-term mortgage (1 - 3 years) may be appropriate. If you like the current rates & want the security of budgeting for the future, a long-term mortgage (4-10 years) may be the best option. Generally speaking, the shorter the term, the lower the rate.
Closed Mortgages vs. Open Mortgages
Open mortgages offer the freedom to end your mortgage at any time or to pay off any portion of the mortgage without a penalty. Closed mortgages come with a lower interest rate but charge a penalty for exceeding your prepayment privileges or if you break the mortgage before the end of term. Typically, only homeowners planning to sell within a year or make considerably large lump sum payments choose open mortgages. The reason being that open mortgages are offered at higher rates than closed mortgages.
This type of mortgage is only available to well-qualified borrowers with 20%+ equity in their home. Consisting of two parts - a mortgage portion & a line of credit portion - you can re-borrow the principal you pay off each month without having to apply for additional credit. As you make your mortgage payments, the lender increases your line of credit by the amount of principal you pay off each month. A readvanceable mortgage is ideal for unexpected emergencies, investments, the Smith Manoeuvre, or other expenses.
For a free consultation on what mortgage is right for you, contact Derek firstname.lastname@example.org - http://www.mortgagealliance.com/DerekChristiansen