Choosing a mortgage
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A look at the main decisions you need to make when shopping for a mortgage
You'll find lots of choices when you go shopping for a mortgage. And every lender promotes their products differently. But there are some basic choices that you'll need to make:
- Amortization period
- Mortgage term
- Type of mortgage:
- open or closed
- fixed or variable rate
- Any prepayment features
1. Choose the amortization period
Decide on the total length of time you’ll take to pay off your mortgage in full. Most people choose between 15 and 25 years. If you have a government-insured mortgage, the most you can ask for is 30 years.
2. Choose a mortgage term
Mortgage terms are shorter than the amortization period – in most cases, from 1 to 5 years. At the end of the term, you'll have to renew your mortgage. The longer the term, the higher the interest rate. That’s because you're getting a set rate for many years — no matter if interest rates go up or down.
3. Choose the type of mortgage
Open or closed
An open mortgage gives you the option of paying your mortgage back in full, at any time. Interest rates tend to be higher for open mortgages. Closed mortgages are more restrictive. You may be able to pay back part only of the principal, only at a specific time. And there may be penalties.
Ask yourself how likely is it that you will have extra money to pay off your mortgage. You pay for flexibility when you get an open mortgage.
Fixed or variable rate
A fixed rate mortgage has the same interest rate for the entire term. The interest rate on a variable mortgage changes as the Bank of Canada changes interest rates.
Consider a fixed rate mortgage if:
- You think interest rates are going up soon.
- You are worried about penalties if you sell your home before the end of the term of the mortgage.
Consider a variable rate mortgage if:
- You think you may sell your home before end of the mortgage term.
- You are comfortable letting your mortgage rate float with interest rates.
4. Choose prepayment options
Ask your lender about these options for paying your mortgage down more quickly:
- making annual lump-sum payments
- paying extra on your payment dates (often called "double up")
- increasing the amount of your payments
- 10/10, 15/15 and 20/20, which refer to the percentage lenders will allow you to increase your payments by, or the percentage amount allowed as a lump-sum payment.
Keep track of interest rates. Some lenders will let you switch from a variable to a fixed rate mortgage as interest rates start to rise. This is called “locking in.”