How to choose a mortgage

Selecting the mortgage that’s right for you involves a lot of background work based on your short- and long-term needs, financial state and credit score, to name just a few. We’ve compiled this guide to help you navigate the ins and outs of what goes into the mortgage selection process, and answer your questions along the way.

Key Takeaways

• Before you dive in, be sure to have an idea of how much mortgage you need, and the down payment amount you’ll need to get there.
• A great rate is just one part of your mortgage – you'll need to consider your term, payment frequency, and prepayment privileges and other administrative charges associated with your mortgage as well.
• Knowing what factors work together to determine your mortgage rate can help you better understand the process. The rate you’re offered is based on a number of considerations that are unique to you.
  
  

Estimate your mortgage affordability

When searching for a home, one of the first steps to take is figuring out how much mortgage you can afford, commonly known as mortgage affordability.

Mortgage affordability represents the maximum mortgage you can afford, taking into account your income, monthly expenses, and the carrying costs of owning a home. Knowing your mortgage affordability is an essential step in the mortgage process, as it provides a clear picture of whether you can comfortably afford your mortgage payments. An assessment of your capacity to afford a house will also help you find the home in the right price range to fit your budget.

Determine your down payment

Saving for the down payment on your first home requires diligence and patience. That said, it’s well worth the effort as taking the plunge into home ownership is both rewarding and financially satisfying when you begin building equity and wealth in a property of your own. 

The minimum down payment when buying a home in Canada is 5% of the purchase price for a home valued at $500,000 or less and 10% for the portion of the purchase price above $500,000. For homes over $1 Million, your down payment will need to be 20%. It is worth noting that in all cases, if your down payment is less than 20%, your mortgage will be subject to mortgage default insurance.

Rates and terms

Currently, nearly 70% of home buyers in Canada have a fixed mortgage rate. More than 60% chose five years as the renewal term for their mortgage. 

Having a fixed rate means that your rate will remain the same over the term of your mortgage. 

The “term” refers to the duration of your current rate, whereas your “amortization” is the length of time it will take to pay off your mortgage in full.

Although the five-year fixed-rate option is undoubtedly the most common choice selected by Canadian homeowners, it’s worth noting it isn’t always the best choice for everyone. The term you choose should be based on your risk tolerance as well as your ability to withstand increases in mortgage payments. Sometimes it makes sense to opt for a lower or higher term than five years. Log into EQ Bank and head over to Mortgage Marketplace to get access to a broker who can help you decide which term makes sense for you.

A variable-rate mortgage fluctuates with the lender’s prime rate throughout your mortgage term. So, while your mortgage payment will remain the same throughout your term, your interest rate may change based on market conditions. If the prime rate rises or falls, this impacts the amount of principal you pay off each month. When rates on variable mortgages drop, more of your payment is applied to your principal balance. Conversely, if rates increase, more of your payment will go towards the interest portion of your mortgage.

The most popular variable-mortgage terms are three and five years, although they’re available in all increments from one to five years, with some lenders offering longer terms as well.

When selecting a term length you have to weigh a few factors, including how long rates are going to stay low or high and the duration of time you plan to stay in your home. Keep in mind, breaking your mortgage early can lead to some hefty early payout charges.

Find the right type of mortgage

In addition to selecting a fixed or variable mortgage and the length of your mortgage term of one - ten years (see above), you’ll have to decide if you want an open or closed mortgage and special features such as prepayment privileges.

With an open mortgage, you’re able to pre-pay any amount of your mortgage at any time without facing a prepayment charge. The compromise for having an open mortgage is that interest rates are higher to make up for the flexibility of being able to pay it off at any time. 

With a closed mortgage, on the other hand, the interest rate is more attractive than an open mortgage because you’re limited by how much extra you can pay towards your mortgage each year. The compromise here is that you’ll face a prepayment limit, meaning that you’re only permitted to pay a certain percentage of your original or current balance per year – often 15%, on average, but this varies between lenders. If you have the choice, be sure to always opt for the original balance prepayment option as it will enable you to pay off more in a year. And if you choose to pay more than your annual limit, you’ll have to pay a prepayment charge. A pre-payment charge is a fee charged by your lender when you prepay the entire balance of your mortgage loan, or a portion of the balance in excess of your prepayment privilege, prior to the maturity date.  It’s important to be aware of your limits and stay within them, unless you’re willing to pay the associated charge.

Having prepayment privileges can be a great option, because every dollar you pay towards the principal balance of your mortgage reduces the overall interest you’ll pay. This can shave a lot of time off the number of years it’ll take you to become mortgage-free.

Mortgage-free faster? A few ways to get closer to your goal with prepayment privileges;

• Lump-sum payments – Use work bonuses, inheritances or extra savings to your advantage
• Payment schedule – Switch your payment frequency to accelerated bi-weekly mortgage payments. With this option, you’re making one additional monthly payment per year, which can really add up over time
• Increase regular payments – Rounding up your regular mortgage payments even a few dollars each cycle can help your balance decline sooner
  
  

Understand mortgage interest rates

Borrowers qualify for different mortgage rates based on criteria lenders use to measure risk when loaning you money for a mortgage as well as specifics surrounding loan amounts and product offerings.

Knowing what factors work together to determine your mortgage rate can help you better understand the process. The rate you’re offered is based on a number of considerations that are unique to you, including;

• Mortgage Amount
• Credit History & Score
• Income
• Down Payment
• Debt-to-Income Ratio
• Mortgage Rate Type (fixed or variable)
• Mortgage Term (one-year, three-year, five-year, etc.)
• Lender
  
  
  

We know, that’s a long list of factors, but there are a few things you can do to help ensure you get a great mortgage rate. Examine your credit score to ensure it’s in good shape, maximize your savings for a down payment, and reduce your existing debt where possible.

With EQ Bank’s Mortgage Marketplace, we offer all the help of a mortgage broker, without you paying a cent. Get the guidance you need to help you reach your goal and guide you through the exciting process of home ownership. Log in to EQ Bank and head over to Mortgage Marketplace to get started.

This article was originally posted to nesto.ca and has been modified.