Basically, a mortgage is just a loan used to finance the purchase of a property. The property itself is used as security to ensure repayment and the lender holds the title or deed to the property either directly or indirectly (depending on your jurisdiction and type of lender) until you have repaid the entire amount plus interest.
When shopping for a mortgage you should keep in mind that there are many variables to consider. The basic choices in selecting a mortgage include:
- Mortgage vs. HELOC
- Conventional Mortgage vs. High Ratio Mortgage
- Term length
- Amortization Period
- Closed vs. Open Mortgages
- Fixed Rate vs. Variable Rate
- Monthly Payments vs. Accelerated Bi-Weekly Payments
The "term" of a mortgage is the length of time you are locked into a mortgage before it has to be renegotiated. The “amortization period” is the length of time that it will take to pay the total principal and interest. You can choose between a short-term mortgage that needs to be renegotiated every year and a long-term mortgage where you lock your loan in for 10 or more years. The most common term is 3 to 5 years with amortization periods up to 35 years.
With a “closed mortgage” you are locked into a fixed payment for the term of the mortgage with limited pre-payment options, but the “open mortgage” lets you pay off as much of the principal as you want, any time, without penalty. A closed mortgage usually offers a lower interest rate than an open mortgage with the same term. Most closed mortgages offer a pre-payment option where a percentage of the principal may be prepaid on the anniversary date without penalty.
Mortgages can range from “fixed rate mortgages” where the interest rates never change, to “variable rate mortgages” where interest rates are pegged to the Bank of Canada rate, allowing them to rise or fall over time as the economy changes. Between these two extremes are a variety of other products that attempt to blend the advantages of the guaranteed interest rates of fixed rate mortgages with the interest rate flexibility found in variable rate mortgages.
“Accelerated bi-weekly payments” divide the monthly payment in half and make them payable every 2 weeks. This means you will make 26 half payments a year or 13 full payments a year. These extra 2 half payments can reduce the life of your mortgage by several years. This will significantly reduce the total amount of interest paid. The disadvantage is that it may be difficult to budget for a half payment every 2 weeks and there will be 2 months in every year that have 3 half payments.
One of the most important things you need to do before committing to any type of mortgage is to sit down with a mortgage professional and examine the advantages and disadvantages of all available options and determine how much you can afford and which product is best suited to your current situation and future plans.