Getting approved for a mortgage is an exciting time. While it can be hard work, buying a house is one of the most rewarding experiences people go through in their life. Not only do you have a place to call your very own, but you are also investing your money into your future.
However, there are a lot of things people don’t tell you about getting a mortgage. There is the more obvious stuff such as saving for a down payment and getting your finances in order. But, what’s the difference between a fixed mortgage rate and a variable mortgage rate? Should you opt for an open mortgage or a closed mortgage? Everyone’s financial situation is different, so there is no right or wrong answer. However, to help you decide, I’ve put together this quick mortgage guide to help you better understand your mortgage options before deciding which options are the right choice for you.
With an open mortgage in Barrie, you can make pre-payments of any amount on your mortgage without facing any penalties. An open mortgage provides flexibility until you are ready to lock into a closed term.
However, because of this flexibility, you are charged a higher interest rate compared to a closed mortgage.
If you know that you would rather have the ability to make larger payments on your mortgage, an open mortgage may be the right choice for you. As an example, if you know you may be receiving a large inheritance, you are getting a large pay increase at your job, or you are selling your home soon. In these cases, you could opt for an open mortgage to reap the benefits of being able to pay down a large chunk of your mortgage in one lump sum payment in the near future.
With a closed mortgage in Barrie, you do not have the same flexibility that you do with an open mortgage. You can make smaller/limited lump-sum annual payments of up to 15-20% without paying a penalty fee. Or you also can increase your regular payments by up to 15-20% annually (you can only do one or the other each year, not a combination of both). If you are looking to break your mortgage for a better rate or to pull equity out for a renovation or debt consolidation you would incur a full pre-payment penalty through a refinance transaction.
A closed mortgage limits your prepayment options but usually offers a lower interest rate than an open mortgage.
In Canada, closed mortgages are more popular because most people don’t typically need the flexibility of an open mortgage. Most people would also rather opt for a lower interest rate.
If you are selling your home in Barrie and buying a new one, a portable mortgage allows you to transfer the terms of your existing mortgage. This includes your mortgage balance, interest rate, and terms and conditions of your current mortgage.
If you have favourable terms with your current mortgage or you want to avoid prepayment penalties for breaking your mortgage contract early, you should consider a portable mortgage.
To further understand the restrictions, it’s best to talk to your mortgage lender or mortgage broker so that you can review your specific mortgage terms to know exactly how you might be impacted.
An assumable mortgage is when you take over, or “assume”, someone else’s mortgage and their property. It is also when someone else assumes your mortgage and property. When someone assumes another person’s mortgage, the terms of the mortgage stay the same.
If you are a home buyer and interest rates are high, assuming someone else’s mortgage is a way of getting a lower interest rate. Rather than the buyer having to obtain their own mortgage loan, they can take over an existing mortgage. This can provide a cost-saving advantage to the buyer but, you should still proceed with caution by having your mortgage broker review the current terms before agreeing to take them over.
You only want to consider an assumable mortgage when current market rates are higher than the existing mortgage rate.
Before someone can assume another person’s mortgage, the lender needs to approve the buyer. Once approved, the buyer takes over the remaining payments left on the mortgage and is responsible for carrying out the terms of the mortgage contract no differently than they would with a new mortgage.
To learn if you can qualify for an assumable mortgage, you will need to speak to an experienced mortgage broker. In some cases, a lender may charge a fee for an assumable mortgage. That’s only one of the many possible red flags your mortgage agent will be reviewing the details for so that they can make sure you fully understand the contract you would be taking on.
Fixed vs variable mortgage interest rates
When you are considering your mortgage options, your mortgage broker will offer you different types of interest rates:
- What is a fixed interest rate?
A fixed interest rate is when your rate stays the same for the entire term of your mortgage. If you want to ensure that your payments stay the same, and you want to know how much you will pay in principle by the end of your term, a fixed rate is the better option for you.
If you are also worried or know that interest rates will increase, having a fixed rate will protect you from paying more in interest for the duration of your mortgage.
- What is a variable interest rate?
A variable interest rate varies throughout your mortgage term. Depending on what the current prime market rate is, your interest rate may increase or decrease slightly depending on when the prime rate fluctuates. Compared to a fixed rate, a variable rate typically has a lower interest rate.
If you are comfortable with your mortgage payments and interest rate changing, then a variable rate is the right choice for you. However, you will need to be mindful of the interest rates and watch them closely. If you notice that they start to skyrocket, you would want to convert your variable rate mortgage to a closed rate mortgage to prevent it from increasing even more.
- What is a hybrid/combination interest rate?
A combination of the first two, a hybrid mortgage has both fixed and variable rates. Part of your mortgage has a fixed interest rate while the other part has a variable interest rate. The fixed portion of your mortgage gives you partial protection if interest rates increase. The variable part of your mortgage gives you flexibility if mortgage rates decrease.
Know your best options, work with an experienced mortgage broker!
If you’re ready to get approved for a mortgage, but not sure what type of mortgage you want or need, contact me, Darren Robinson, today! As an experienced mortgage broker, I excel in finding the right mortgage products and services to fit the exact needs of my clients. Whatever your questions are, I have the answers for you. Let me help you weigh out your options and find the best financial path for you specifically. To get started, you can fill out an application online here, or schedule a virtual meeting with me today by giving me a call at 705-315-0516.