Most people need to take out a loan to finance the purchase of a home. Although the loan is often referred to as a mortgage, the “mortgage” is actually what the bank takes as security for giving the loan. By taking a mortgage on your home, the bank has legal rights to your home, and can sell it if you become unable to repay the mortgage loan.

Different financial institutions offer mortgages with a variety of different features. The mortgage that suits you best will depend on your particular lifestyle and preferences.

Open mortgage

First, a mortgage can be open or closed. An open mortgage means that you have the flexibility to make extra payments on your mortgage loan beyond your regular set payments, and you can pay off your mortgage completely at any time without penalty. For example, if you received a $2,000 bonus from your employer, an open mortgage would allow you to pay that money toward your outstanding mortgage amount. However, open mortgages usually have slightly higher interest rates and are usually for a shorter term.

Closed mortgage

Closed mortgages generally have a lower interest rate, are for a longer term, and have reduced flexibility. In most closed mortgages, you can only make your regular set payments, and you cannot pay off your mortgage at any time without penalty. If you are expecting a promotion to a higher paying job in the near future, or if you think interest rates are going down, you may prefer the flexibility and shorter term of an open mortgage.

Fixed and variable interest rate

Second, a mortgage can also have a fixed or variable interest rate. A fixed interest rate means that you lock in at a certain interest rate for a set term. A variable interest rate means that your interest fluctuates with changing market conditions. The benefit of a fixed interest rate is the security and certainty of a set interest rate. The drawback of a fixed interest rate is that it is usually higher than the variable interest rate. If you think interest rates are on the rise, or if you dislike risk, you may prefer a fixed rate of interest. However, if you think interest rates will go down, and if you do not mind taking a risk, a variable interest rate may be better for you.

Short or long-term?

Third, a mortgage can be for a short or long-term. A term is the length of time during which your agreement with the bank exists. Terms usually range anywhere from six months to five years. During this time, you agree to pay a certain interest rate on a certain schedule. When interest rates are low, short-term mortgages usually have lower interest rates than long-term mortgages. When interest rates are high, short-term mortgages usually have higher interest rates than long-term mortgages. If you think interest rates are going to drop, you may want to opt for a short-term. However, if you think interest rates are going to rise, you may want to lock in a long-term.

Amortization period

The term of a mortgage is different from the amortization period of a mortgage. The amortization period is the total length of time you will be making payments on your mortgage before it is completely paid off.

For home buyers with less than a 20% down payment, the maximum amortization period is:

• 30 years if you’re:
  • a first-time buyer and/or
  • purchasing a newly constructed home
• 25 years in all other cases

For home buyers with more than a 20% down payment, your lender sets your maximum amortization period.

The length of your amortization period affects the amount of your monthly payments and the total amount of interest you will have paid on your mortgage loan once it is completely paid off.

Shorter amortization periods result in higher monthly payments, but greater total savings because you pay less interest. Longer amortization periods result in lower monthly payments, but more is spent on interest overall. The term and amortization period are usually not the same. At the end of the term, if the amortization period is longer than the mortgage term, you will still owe money to the lender and will either have to repay it or arrange new financing.

Many financial institutions are prepared to do innovative things to satisfy their customers. For example, you can often arrange a weekly or bi-weekly payment schedule as well as make extra payments in addition to the regular monthly payment. Also, many financial institutions will now pre-approve customers for a mortgage. Rather than waiting until you have a particular home in mind, the bank will consider your financial situation in advance, and guarantee you a mortgage loan for a certain amount before the actual purchase. With this certainty, you can to look for homes that you know are within your price range. Your offer to purchase will also be more attractive to the seller if the agreement is not conditional on financing.

More information on mortgages is available from the Government of Canada.

Need help with a cash deposit?

Are you buying your first home or dream home and are ready to make an offer?

A Home Deposits Now guarantee is the new and improved way of providing the deposit without the stress of having to free up the funds you need right now.

A Home Deposits Now guarantee can help you if:

• your equity is tied up in your existing property,
• you have investments that are locked in,
• you want to keep your money in the market, or
• you are waiting for a gift.

A Home Deposits Now guarantee is a quick, easy and low-cost alternative to a cash deposit when purchasing a residential property. You can avoid the stress and complications of having to obtain certified cheques, a line of credit, bridge financing, borrowing from friends and family, or being forced to liquidate investments and paying breakage and interest fees.

Home Deposits Now can approve your application online in a matter of minutes for up-to 10% of the purchase price. Your Home Deposits Now guarantee will be delivered instantly to your licensed realtor. You can make as many offers with Home Deposits Now as needed until you have secured your new home. Visit Home Deposits Now for a trusted and stress-free alternative to cash deposits by unlocking your equity for a quicker and easier home purchase.

								
You now have 3 options:
								

									
More answers about Real Estate Law
									
Master List: 2,500 Legal Answers
																													
																		
Government Links