Choosing A Mortgage That is Right for You
Choosing a mortgage solely based on acquiring the lowest interest rate is not always optimal. There are other personal factors to consider including your budget, lifestyle goals, and longer-term housing plans. Your personal financial situation will also be a major factor as to the mortgage you may obtain.
Important Mortgage Decisions
When choosing your mortgage, there are a few key things you need to consider. These include:
- The term of your mortgage (length of mortgage): typically, 3, 5, or 10 years.
- The type of mortgage: there are several mortgage types including fixed rate, variable rate, hybrid, open, closed, portable, and assumable.
- Your interest rate: rates will be partially dependent on the preceding two decisions.
Mortgage Terms Should Not be Overlooked
The most common mortgage lengths in Canada are 3, 5, and 10 years. With many people not being confident in their future situation, only 5% of current mortgages are for 10 years or longer.
Your mortgage term should be your first decision as it will lead to what type of mortgage may be best for you. With career decisions driving increasing mobility, younger home purchasers typically look for flexibility and choose a shorter mortgage term.
Personal plans can unexpectantly change and being locked into a long-term mortgage could result in considerable financial penalties if you need to sell your home before the end of the mortgage term.
Choosing a Mortgage Type
The two main types of mortgages are fixed rate (a set interest rate for the term of the mortgage) and variable rate (an interest rate that changes with the prime banking rates, which are dependent on financial environment factors such as inflation). Many people opt for the certainty of a fixed rate mortgage. The most popular mortgage in Canada is a five-year fixed rate mortgage.
Other mortgage types are closed (where you cannot make extra principal repayments – i.e. pay the mortgage down faster – without a financial penalty) vs. open (which allows for extra principal repayments). Closed mortgages will have a lower interest rate relative to open mortgages.
Mortgage options to consider are portability, which allows you to transfer your mortgage to another residence should you have to move, and assumability, which allows the purchaser of your home to assume your mortgage, but these are increasingly rare.
Obtaining the Best Mortgage Rate
Having decided on your mortgage term and type you are now better equipped to shop for mortgage rates and compare “apples to apples”.
The interest rate you obtain on your mortgage is a function of multiple factors. Some of these are driven by your choice of mortgage term and type while others are dependent on your personal financial situation.
Mortgage type and term factors include the length of term, whether it is fixed rate, variable rate, or hybrid, plus additional options such as portability, assumability, and prepayment which can all contribute to your mortgage rate calculation.
Personal factors include your credit history, credit rating, employment record, and current income.
Additional factors may include payment frequency, with options such as monthly, semi-monthly, bi-weekly, or weekly. Your mortgage rate can also be dependent on the type of financial institution offering the mortgage – it could be a bank, financing company, credit union, or mortgage investment company.
Much More Than Choosing the Lowest Rate
Considering the above discussion and the potential landmines of financial penalties, choosing the wrong mortgage just because it comes with a lower rate has the potential to turn the most anticipated purchase of your life into a financial quagmire. It is most important to work with a trusted financial professional who can account for all your personal financial circumstances as well as your lifestyle and future goals to help select the best mortgage structure for you.
This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.