Your Mortgage Primer
As a first-time buyer, a mortgage can seem daunting and complex, but understanding how they work and the different types of mortgages available can make the experience less intimidating. Learn more with our mortgage primer guide.
What is a Mortgage?
A mortgage is a loan used to buy a home or other property. These loans can help provide additional finances to buy a home or property with a long-term repayment time frame of up to 25 years. The home or property becomes the security for the loan.
The Government of Canada website states when you get a mortgage loan, you become the mortgagor. The lender becomes the mortgagee.
You become responsible for making frequent payments to the lender. These payments cover interest on the loan as well as part of the principal (the amount of the loan). Payments can also include property taxes, insurance and similar charges.
When you make a mortgage payment, the lender can use it first to cover the interest. The remaining amount can go to the principal and in some cases to taxes and insurance. At the beginning, only a small amount goes to the principal, but eventually more of the payment goes to the principal until it has been fully paid off. The part of the property that is paid for – both through the down payment and through your mortgage payments – is your equity in the home or property.
Cost of Mortgage
When it comes to how much you pay for a mortgage, it will depend on the down payment. A down payment is the amount of money used towards the purchase of a home. It can be subtracted from the purchase price of the home with the mortgage loan covering the rest of the amount. A bigger down payment will mean a smaller loan, which will mean less interest.
A minimum down payment in Canada is 5 per cent of the home’s price. While, 20 per cent is considered to be a big down payment.
According to RateHub.ca:
- If the purchase price is less than $500,000, the minimum down payment is 5 per cent.
- If the purchase price is between $500,000 and $999,999, the minimum down payment is 5 per cent of the first $500,000, and 10 per cent of any amount over $500,000.
- If the purchase price is $1,000,000 or more, the minimum down payment is 20 per cent.
A mortgage rate is how much interest you will need to pay on your mortgage loan. Depending on the mortgage term, the rates can vary. The terms can either be fixed or variable.
According to Which Mortgage, a fixed mortgage rate will allow you to accurately budget. You will know what your mortgage payment will be for a determined length of time, as well as when your mortgage will be paid in full. Whereas, a variable mortgage rate is adjusted periodically to replicate market conditions.
You can meet with a mortgage professional to discuss what option is best for you. Although do consider the possibility of increasing interest rates and how that would affect your monthly payment.
The Government of Canada website reports that there are two main types of mortgages available: open and closed.
An open mortgage will give you the ability to be more flexible when it comes to making additional payments (also known as prepayments) on the principal or paying off a mortgage completely. They are most likely used for shorter terms such as a year or less. Whereas, a closed mortgage is not always as flexible and may require you to make a prepayment charge if you would like to change the agreement during the term. With a closed mortgage, the interest rates tend to be lower than an open mortgage.
How to Pay a Mortgage
Mortgage payments are a combination of principal and interest. When obtaining your first mortgage, most of the payments will go towards interest and the amount you owe will slowly start to decrease. Once the remaining mortgage balance drops, more payments will be made to the principal.
In terms of how often you need to make mortgage payments, they can be done:
- Weekly rapid or accelerated
For more information on how often to make payments, you can visit the Government of Canada website.
Along, with a mortgage, you’ll want to make sure your new investment is protected with a home insurance policy customized to meet your needs. Start by getting a quote from Desjardins!