Deciding on a mortgage strategy

Understanding your options and choices

It is likely the largest financial decision of your life – buying a home and taking on a mortgage. There’s a lot in play and a lot at stake when you make that decision. It’s important to be informed, especially since you’ll be living with your mortgage for a long time.

Buying a home can make even the most confident consumers second-guess themselves. By doing your homework and considering the options before shopping for a mortgage, you'll be well prepared to make the right choice.

Here are some things to think about and several ideas on how to pay off your mortgage sooner.

Opportunities for first-time home buyers

If you're a first-time home buyer, but don’t have enough for a 20% down payment, you may qualify for a high-ratio mortgage from Canada Mortgage and Housing Corporation (CMHC). With a high-ratio mortgage, mortgage loan insurance is required, and the premium is calculated as a percentage of the loan and is based on the amount of your down payment.

The federal government also offers incentives and savings plans for first-time homebuyers:

• The First-Time Home Buyers' (FTHB) Tax Credit is a non-refundable $10,000 income tax credit to help offset the costs associated with purchasing a home.
• The Home Buyers' Plan (HBP) allows buyers who haven't owned a home in five years to use RRSP funds to buy a home. The HBP withdrawal limit is $60,000.
• The First Home Savings Account (FHSA) allows would-be Canadian homeowners to save for their first home in a registered plan similar to the RRSP and TFSA. The plan permits a tax-deductible annual contribution up to $8,000 for up to 15 years with a $40,000 lifetime limit.

Understand how interest is compounded

Compound interest on a mortgage refers to the interest you pay on the interest that is owing on your mortgage. The more frequently the interest is compounded, the more you will pay. Generally a fixed rate mortgage is compounded semi-annually and a variable rate mortgage is compounded monthly. When discussing your mortgage with your lender, be sure to ask how frequently the compounding occurs. If the mortgage you are considering compounds more often than what is commonly available you will end up paying more than you need to.

Are you open or closed?

An open mortgage allows a homeowner to pay down the debt at any time without penalty or renew a mortgage at any time to take advantage of low interest rates. A closed, fixed-rate mortgage gives you the security of locking in your mortgage at a set interest rate for a longer period of time. Closed variable-rate mortgages provide a set interest rate based on Prime Rate; however, as Prime moves so will the application of your interest and principle portions of your payment. Closed mortgages often allow a variety of pre-payment options.

Choose your rate of comfort – variable or fixed

In almost all cases, a variable rate mortgage will have a lower interest rate than a fixed rate. You may be the kind of person who is comfortable watching rates and accepting the possible ups and downs. Because a variable rate mortgage generally offers fixed payments, it is the contribution to your principal that fluctuates. If you are willing to accept some risk you could save money with a variable rate mortgage.

Or, you may be the kind of person who would rather not watch mortgage rates, and are comfortable knowing that your rate stays the same whether interest rates go up or down. A fixed rate mortgage may be a better choice for you if you can give up the potential of savings for security.

Ask about a split or multiple rate

It can be hard choosing which type of mortgage and term length is right for you. When you really want the best of both worlds, ask your lender if they offer split or multiple rates. This allows you to split your mortgage into two or more terms to take advantage of different rates and term lengths.

Check your prepayment options

Whether you opt for a ten, five or one year mortgage term, find out what the prepayment options are. Why? You may want to adjust the terms of the loan during the contracted period, especially if rates change, you have excess cash flow or you sell your home. Prepayment options include annual lump sum payments or accelerated bi-weekly or weekly payments to pay off the principal faster.

Get pre-approved before you start house hunting

You can hold the current rate for up to 90 days while looking a suitable property.

Whether you are in the market for a new home or are looking to upgrade, talk to a BlueShore Financial financial advisor today about all your mortgage options.