A quick guide to help you understand all the complicated terms attached to mortgages
After shopping around, finding your dream home and making an offer, you’ll need to sit down with a mortgage broker or bank to talk about how you can get the money to buy it! The financing part of buying a home can be extremely intimidating – not just because the numbers are big, but because a lot of new words are thrown around, some of which you may or may not have ever heard before.
We suggest studying the following key terms, so you can walk into the appointment and know exactly what’s being discussed:
Down Payment – This is the amount of money you were saving up, before feeling like you had enough to make the purchase. When you buy a home, your down payment is subtracted from the purchase price, and then you take out a mortgage for the rest. (So, the more you can save and put down, the less you’ll need to borrow!) In Canada, the minimum down payment you can make is 5% of the purchase price.
CMHC Insurance – If you put down anything less than 20% of the purchase price, you’re required to purchase CMHC insurance. The insurance is meant to protect whoever lends you the money for your mortgage, in case you ever stopped making payments and defaulted on your loan. You don’t need to pay for it with cash upfront: CMHC insurance is added to your mortgage and paid off over the life of your loan.
Amortization Period – Your amortization period is the length of time it will take you to pay off your entire mortgage from start-to-finish. In Canada, the maximum amortization period you can get is 25 years.
Mortgage Term – Inside your amortization period, you’ll have a handful of mortgage terms. A mortgage term is simply a period of time that you agree to repay your mortgage at a particular interest rate. You can get mortgage terms ranging from 6 months to 10 years, but the most common term is 5 years. When one term is up, you renew for another – and you keep doing that until your mortgage is paid off in full!
Mortgage Payment – When you agree to a specific mortgage term, you’ll be quoted a mortgage payment amount; this is the minimum amount you must repay on your mortgage loan. But it’s up to you to decide how often you want to make payments. You can choose from the following options: monthly, bi-weekly, accelerated bi-weekly, weekly and accelerated weekly. Each option changes the payment amount slightly, so get your broker or lender to show you how choosing each one would affect your finances.
Fixed Mortgage Rate – If you get a fixed mortgage rate, you are locking into one rate that will stay the same for the length of your mortgage term. For example, you could get a 5-year fixed rate at 2.99%. For those 5 years, your interest rate and mortgage payment amount would stay the same, which is great for budgeting purposes.
Variable Mortgage Rate – If you get a variable mortgage rate, instead, your interest rate is attached to the bank’s Prime rate. For example, you could get a rate of Prime – 0.50%. If the bank’s Prime rate ever went up or down, your interest rate (and your mortgage payment amount) would go up or down with it. This sounds scary, at first, but Prime rate has been the same since September 2010.
Closing Costs – When you buy a home, the money part of the transaction goes beyond just your down payment and your mortgage. Before you can actually pick up the keys, there are a few closing costs you’ll need to pay first, including a home inspection, land transfer tax, etc. Closing costs can add up to between 1.5 and 4% of the purchase price of your home, and they need to be paid for with cash – so be prepared to save a little extra for these costs!
Condo Fees – If you purchase a condo, instead of a house, you’ll need to be prepared to pay for more than just your mortgage each month – you’ll also need to pay for your condo fees (known as strata fees in some provinces). Condo fees can range drastically in price from building-to-building, depending on the location of the building and its amenities, but are typically at least a few hundred dollars per month. The fees are used to cover building insurance, maintenance of any amenities, and sometimes a portion of your utilities.
If, after reading through these key terms, you’re still confused about something your broker or lender mentions in your appointment, don’t be scared to ask what they’re talking about! It’s their job to make sure you understand exactly what you’re signing up for, so don’t leave any question unanswered.