How to pick the perfect type of mortgage.
With record low interest rates, more people are getting into real estate than ever before. While many people believe that mortgages are more of less the same. I can assure you, they are not.
It’s tempting to choose the mortgage with the lowest interest rate. It’s attractive because the lower the rate, the less interest you will end up paying and the faster you can pay off your mortgage. However, picking a mortgage is more than just interest rates. There are other factors to consider to be mortgage free faster.
So what are the considerations when determining the right type of mortgage for you?
Fixed or Variable Rate?
Fixed Rate Mortgage: The mortgage interest rate and your payments will stay consistent for the term of your mortgage.
Variable Rate Mortgage: The mortgage rate will change with the prime lending rate set by your lender.
When interest rates are low, a variable mortgage usually offers lower rates than a fixed rate.
Which one should you choose? This has become one of the most common questions I am asked by clients. Historically, variable rate mortgages have fared better in the long run. However, with record low interest rates, and the Bank of Canada suggesting that they are only going to go up. (The million dollar question is when, and how much). There is no easy answer.
For most mortgages you have to choose one. Which type of mortgage will be best when your term expires is impossible to predict with any certainty.
The Term of Your Mortgage:
A Mortgage term is the length of time you are committed to a mortgage rate, lender, and conditions of the mortgage. The term can vary between 1-5 years.
Which one you choose will have a direct effect on the interest rate, with shorter terms historically having a lower rate.
When the term expires, you will then have to renew your mortgage for the remaining principle, for the interest rates available at the end of the term.
Flexibility – Pre Payment Privileges:
A Prepayment privilege is the ability to prepay a portion of the mortgage principal before it is due and without penalty. Each individual mortgage has varying rules regarding whether it allows additional payments, when you can make these additional payments and the amount of additional payments. For example, a mortgage may provide that 15% of the principal can be paid annually without penalty.
Often, limited prepayment privileges offer a better interest rate.
As you can see, picking the right type of mortgage for you is about more than just choosing the lowest interest rates. It’s about determining what works best for your family.
Please try our Instant Calculator to give you a general idea of how much your mortgage will cost you monthly.
*The calculator contained on this page is for estimation purposes only. The actual payment amount must be obtained from your lender. Frost Law, Professional Corporation assumes no liability for the accuracy of the calculator.