Best Mortgage
Updated: September 04, 2020
How to define Best Mortgages?
There is no one sentence definition for a best mortgage. In my opinion, It depends on individuals need, circumstances and end goal. Is it the lowest interest rate or conditions or in fact both together?
This article is an attempt to shed some light on factors that will make a loan product best or worst, literally. Lets familiarize ourselves with some most common terms used out there. The info here stays relevant when you are looking for a mortgage to buy a home to live in, investing or refinancing it.
4 Major Components of A Best Mortgages in Canada
Their are 2 choices to pick from i.e. fix rate and variable rate mortgages. To understand your interest rates choices better its equally important to know what are posted rates and how does they affect your rates associated penalties.
What are Fix Rate Mortgage loan?
When an interest rate stays the same for the entire term of the contract its referred to as fix rate . Its favored by many because it keeps the monthly payments of mortgage the same for the entire term.
Example: 1.75 % fix rate mortgage on 5 years term (August 26, 2020; Rates may change without any notice)
Fix Rate Penalties: You rarely get a clear penalty amount when you call your lenders because its not that straight forward. Your fix rate penalties depends upon following two major factors;
- The amount of discount a lender offered you when you got the mortgage approved
- The time left from the term left.
What are Variable Rate Mortgage Loan?
This rate type depends upon prime rate which is setup by each lender individually on the basis of Bank of Canada’s over night lending rates. The monthly payments will change every time banks prime rate changes.
Prime rate is 2.45% (August 26, 2020; Rates may change with out any notice)
Your variable rate is always Prime plus/minus certain percentage . This rate changes with the prime rate .The on reason why real estate owners love variable rate mortgage is its favorable pre payment penalties.
3 months interest payment penalty is all you pay if you decide to get out of the contract.
Example: Prime – 1% variable rate mortgage means 2.45% – 0.45%= 2.0 %
Term (time): This refers to the the time for which a lender has agreed to offer you the particular interest rate type namely fix rate or variable. The two common terms are open mortgage or close mortgage.
What are Open Mortgages?
Open mortgages are type of mortgages which allows you to pay off the whole mortgage principal in full with out any pre payment penalties. The mortgage rates are higher than usual but it provides greater flexibility in terms of paying off the mortgage faster. This puts you at risk in case interest rates rise up.
What are Close Mortgages?
Close mortgages are the type of mortgages which restrict you to pay off the outstanding mortgage amount in full until your term is completed. You are allowed to pay it off faster but banks will charge you a penalty. In a bigger picture close mortgages are restrictive in nature. Both fixed interest rate and variable rate mortgages can be a closed mortgages.
Its the amount of time required to pay off the mortgage in full as a home owner. Amortization is also referred to as amortization period.
Amortization period depends upon your down payment. For a Conventional mortgage you can have a amortization period of up to 30 years. For all high ratio mortgages the maximum amortization period allowed in Canada is 25 years.
Dont forget to ask for your copy of amortization schedule when you get your home mortgage approved.
It is the mortgage interest rate which lenders offer officially to their clients. Majority of times its set up higher by whole 1% if not more. You may get lower than posted rate if you are capable of negotiating interest rate with a bank.
Banks posted rates also plays huge role when calculating fix rate mortgage penalties. Bigger the discount you end up negotiating with your bank, bigger the penalty you pay in case you decide to break your mortgage term or pre pay it via selling your real estate or refinancing it.
The important thing you need to remember is due to the discount component of posted mortgage rate, the penalties tends to get higher especially when rates drop.
In general 5 years fixed rate mortgages are most discounted with respect to the posted rate of banks.
To learn more on restrictive mortgages continue reading this article till end….
2 Categories of Interest Rates when shopping for Best Mortgages ?
Restrictive Mortgages
They are exactly what they sound like. These rates come with many restrictions. Many home owners are not even aware aware of the restrictions. Often times, these interest rates are the lowest and most advertised.
Liberating Mortgages
This group of solution look at more than just interest rates. If you are looking for flexibility in terms and conditions, a liberating mortgages is what you should go with.
If you are given a choice, what mortgage product will you go with?
Liberating or Restrictive
The name says it all, restrictive rates are products provided by lenders with lots of restrictions. They tend to be very primitive in nature and are primarily based on interest rates.
Due to the availability of highly customized mortgage products very few home buyers go for it, once they are explained the restrictions properly.
Restrictive mortgages are for home owners who only care about the lowest possible interest rate and don’t have intentions to sell or refinance their loan before the end of their term.
However, before you make a rash decision that you could regret, we wants to give you the tools to you to be well informed so that you can make an informed decision about best home loan out there.
The table below compares the features of restrictive and non-restrictive mortgages making them best /worst.
| Features | Restrictive Mortgages | Liberating Mortgages |
|---|---|---|
| Interest Rate Choice | Fixed Only | Your Choice – Fixed/ Variable |
| Interest Rate (%) | 1.99%, 5 years fixed, 10% down; 25 years | 1.99%, 5 years fixed, 10% down; 25 years |
| Pre Payment | Only up to 10/10 | Up to 25/25% |
| Secured -LOC | Not Allowed | Allowed |
| Portability | Not Allowed | Allowed |
| Renewal option | 5 years fixed only | Your Choice |
| Purchase + Repairs option | Not Allowed | Allowed |
| Fully Close(Have to Sell to Refinance) | Yes | No |
| Penalties | IRD only | 3 months Interest on VRM |
| Amortization | Only 25 Years | 30 years and up if qualify |
| Payment Skip option | Not Allowed | Allowed |
| Rental Property | Not Allowed | Allowed |
| Term | 5 years Fixed only | Your Choice |
| Cash Back Options | Not Allowed | Allowed |
| Blanket Mortgage option | Not Allowed | Allowed |
| Use of pre Maternity leave Income while on mat leave to qualify | Not Allowed | Allowed |
| What should you do to go to other bank for a mortgage in future? | Have to Sell your property | Free to refinance with any bank, any time WITHOUT selling your home |
Be aware of the allure of restrictive mortgages aka No Frill Mortgages!
When it comes to restrictive rates, even if you forget everything else that you have read on this page, remember these two points:
- Lowest interest rates are commonly used to bate people and to attract business. Always ask for details.
- In most cases, restrictive mortgages may not the best deal
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