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Mortgage FAQs

If you have a mortgage question, chances are other have had the same one, so we answer some Frequently Asked Questions below.

Q: How much of a down payment do I need?

A:  A down payment is the amount of money that you pay at the time of purchase toward the price of your home. Your mortgage loan covers the rest. You should have a good idea of how much you can put toward the down payment before talking to a potential lender or mortgage broker.

When you are at the stage of being ready to make an offer to buy a home, you will need to provide the seller with a deposit. The deposit forms part of your down payment, with the rest to be paid when you “close” the purchase of your new home.

When buying a home, the minimum down payment is at least 5% of the purchase price. For example, to buy a home that costs $250,000, you will need a minimum of $12,500 as your down payment.  

 

Q: What is Mortgage Default Insurance and how do I know if I need it?

A: Mortgage default insurance (sometimes called mortgage loan insurance) protects the mortgage lender in case you are not able to make your mortgage payments. It does not protect you.

You must pay for mortgage default insurance if your down payment is less than 20% of the purchase price of your home. This is called a high-ratio mortgage. Your mortgage costs will be higher if you need to get mortgage default insurance.

The maximum amortization period is 25 years for mortgages with mortgage default insurance. For more info visit our Mortgage Default Insurance page

 

Q: What is a homebuyers plan?  What does it do for me?

A: The Home Buyers’ Plan (HBP) allows you to withdraw money from your Registered Retirement Savings Plan (RRSP) tax-free to use for a down payment.

You must meet certain conditions to be eligible for the HBP. For more information, contact the Canada Revenue Agency (CRA). To find out how much you can withdraw and the payback period, visit the Homebuyers' Plan page

 

Q: What’s the difference between an open and closed mortgage?

A: The main difference between open and closed mortgages is the amount of flexibility you have in making extra payments on the principal or in paying off the mortgage completely. These types of extra payments are called prepayments.

Open mortgages allow you to make prepayments whenever you want. Closed mortgages often include prepayment privileges, which give you the option to make prepayments up to a certain amount.

By making prepayments, you can save thousands of dollars in interest charges by paying down your mortgage faster. For more information, visit our Closed vs Open Mortgage page.

 

Q: What is an amortization period?

A: The amortization period is the length of time it takes to pay off a mortgage in full. The amortization period is not the same as the mortgage term, which is the length of time your mortgage agreement will be in effect (for example, five years).

If your down payment is less than 20% of the purchase price of your home, the longest amortization period allowed is 25 years.

Although a longer amortization period means lower mortgage payments, it is to your advantage to choose the shortest amortization period—that is, the largest mortgage payments—that you can comfortably afford. You will pay off your mortgage faster and will save thousands or even tens of thousands of dollars in interest in the long run.

The following table shows how much interest is paid (over different amortization periods) on a $200,000 mortgage, assuming a constant annual interest rate of 4.5%.

How amortization affects the interest you will pay

Mortgage amount

Amortization

Monthly payment

Total interest paid

$200,000

25 years

$1,107

$132,084

$200,000

20 years

$1,261

$102,594

$200,000

15 years

$1,526

$74,633

$200,000

10 years

$2,069

$48,251

In the above example:

  • increasing your payment by just $154 from $1,107 to $1,261 per month means you would be mortgage-free five years earlier and save nearly $30,000 in interest
  • increasing the monthly payment by $419 from $1,107 to $1,526 would allow you to be mortgage-free 10 years earlier and save over $57,000 in interest.
  • if instead of increasing the monthly payment to $2,069 per month, you made extra lump-sum payments against your mortgage of ~$12,000 per year, that is roughly equivalent and you would be mortgage-free in 10 years. 

Q: What is a mortgage contract term?

A: The mortgage term is the length of time your mortgage agreement, including the interest rate, will be in effect. Terms can range from just a few months to five years or longer.

Most borrowers require multiple terms to complete the amortization period and repay their mortgage loan in full.

At the end of each term, you will need to renew or renegotiate your mortgage, unless you are able to pay it off fully at that time.

If you pay off your mortgage or break your mortgage contract before the end of your term, you may have to pay a prepayment charge depending on the type of mortgage you have.

Short-term mortgages

Short-term mortgages may be a good choice if:

  • You plan to change your mortgage within the next couple of years—for example, if you expect to move to another city
  • You expect interest rates to go down soon.
  • Short-term mortgages can help you avoid prepayment charges—a shorter term means you will not have to wait as long until your term’s maturity date, when you can negotiate your mortgage or go to a different lender without triggering any prepayment charges.

Long-term mortgages

Long-term mortgages help with budgeting, since you will know for certain what your housing costs will be for a longer period.

Long-term mortgages may be a good choice if:

  • You want to “lock in” a current low interest rate for a longer period
  • You do not plan to make any changes to your mortgage for several years.
  • Some lenders also offer short-term “convertible” mortgages that can be extended to a longer term.
  • When converted, the interest rate will also change to the rate offered by the lender for the longer term.

Convertible terms

  • Some lenders also offer short-term “convertible” mortgages that can be extended to a longer term.
  • When converted, the interest rate will also change to the rate offered by the lender for the longer term.

Q: What’s the difference between a fixed, variable and hybrid interest rate?

A:  When you apply for a mortgage, lenders may offer you options with either fixed or variable interest rates. Some lenders also offer a “hybrid” option that combines fixed and variable portions in the same mortgage

With a fixed interest rate, You will know in advance the amount of interest you will have to pay (assuming you don’t make any prepayments), and therefore how much of the original loan amount will be paid off during the term. The interest rate is set or “fixed” when you apply for a mortgage. This interest rate remains the same for the entire term.

With a variable interest rate, your payment amount changes if the interest rate changes. A set amount of each payment is applied to the principal, and the interest portion fluctuates depending on changes to the interest rate. If the interest rate goes down, your payments will decrease. If the interest rate rises, your payments also increase.

Some lenders offer a hybrid interest rate where part of the mortgage is financed at a fixed rate and part is financed at a variable rate. The fixed portion gives you partial protection in case interest rates go up, and the variable portion provides partial benefits if rates fall. The portions may have different terms. For example, a hybrid mortgage may include a two-year term for the variable portion and a three-year term for the fixed portion. Hybrid mortgages that include portions with different terms may be difficult to transfer to another lender.  For more information on the differences visit our Interest Rate Types page.

 

Q: What are my payment frequency options?

A:  Payment frequency refers to how often you make your mortgage payments. Options include:

  • monthly
  • semi-monthly
  • biweekly
  • accelerated biweekly
  • weekly
  • accelerated weekly.

Your payment frequency is set when your mortgage is first arranged, but you may be able to change it afterwards, usually without having to pay a fee. To read more, visit our Payment Frequency page. 

 

Q: What is the difference between a collateral and standard charge mortgage?

A: Your lender will register what is known as a “charge.” This process provides a means of securing a mortgage or other loan against your property. There are two types they may use: standard and collateral.

Residential mortgages have traditionally been registered with a standard charge.

A collateral charge mortgage allows you to use your home as security and potentially borrow additional funds or change loans and other credit agreements, without the need to discharge your registered mortgage, register a new mortgage for a higher amount and pay legal fees. For more information on the differences visit our Collateral vs Standard Charge Mortgage page 

 

Q: What is a Home Equity Line of Credit (HELOC) and is it right for me?

A: A home equity line of credit (HELOC) is a revolving line of credit secured by your home. You can borrow money up to the credit (global) limit, which is usually a percentage of your home’s value, not to exceed 80%.  A HELOC is an option for borrowing on your home’s equity, which is the difference between the value of your home and the unpaid balance of any current mortgage. For more information, see Borrowing on home equity

It is also possible to get a HELOC instead of, in addition to, or containing a traditional mortgage. These products may be split into portions that you repay in different ways. For example, a HELOC may have a portion with a fixed interest rate, another portion with a variable interest rate, and the balance as an available open line-of-credit.

Key points 

  • Registered with a collateral charge: After a HELOC is set up, you do not need your lender’s approval to borrow funds up to the credit limit, subject to the terms of the HELOC agreement.
  • Additional funds can be advanced: You can borrow money up to the credit limit on the HELOC, which is usually a percentage of your home’s appraised value. After you make repayments, the funds become available for you to borrow again.
  • Variable interest rate: The interest rate for a HELOC is usually variable, so your payments will increase or decrease as Prime Rate changes. The 'open' interest rate on the HELOC portion is also more expensive than a closed fixed or variable rate.
  • Interest-only payment option: You may have the option to just pay the interest due on a HELOC instead of a set payment amount. However, be aware that making interest-only minimum payments will increase the overall cost of your loan and the time you need to repay it since you are not paying off the principal. 
    It can be very easy to borrow more money than you can comfortably afford to repay with a HELOC. Make sure you will be able to handle repayments if interest rates and your payments increase in the future.
  • Ability to make prepayments: You can generally prepay any amount whenever you want on the HELOC portion without the need to pay a prepayment charge. Note that prepayment charges may apply to any other portions that have a closed term. 

The features and characteristics of individual lenders’ products may vary. Check with the lender.

 

Q: How do mortgage payment parts work?

A: Payments are split in part between interest and principal. For each mortgage payment you make, the money is first used to pay the interest on your mortgage loan. The rest of your payment is then used to reduce the principal, which is the amount that you borrowed from the lender.  Visit our Mortgage Payment Parts page for more information on the topic.

 

Q: What are my Insurance options?

A:  Yes, there are many other insurance options to consider to compliment and protect your home investment, including life insurance, disability or critical illness insurance, title/fraud insurance, house/fire insurance, and job loss insurance. To learn more about these and where to get them, visit out Insurance Options page.

 

Q: What are my other mortgage options?

A: There are a few other types of mortgage options available for those who qualify:

Portable mortgages

Porting a mortgage refers to transferring some or all of the terms and conditions and outstanding balance of the mortgage on your existing home to a new property while remaining with the same lender.

Homeowners often port their mortgages when they have a lower interest rate on their existing mortgage than is available for a new mortgage.

By porting your mortgage to your new property, you can usually avoid prepayment charges for breaking your mortgage contract early.

Check with your lender to see whether your mortgage is eligible for porting and whether any conditions or restrictions apply. Generally, you must re-qualify for the mortgage.

Assumable mortgages

An assumable mortgage allows a home buyer to take over the seller’s existing mortgage along with the property. The terms of the original mortgage must stay the same. In most cases, the lender must approve the transfer as well as the buyer who wants to assume the mortgage.

If approved, the buyer will take over the remaining mortgage payments to the lender. Lenders may charge the buyer a fee to assume the mortgage.

Important: In some provinces, the seller may remain liable for the mortgage after it has been assumed by the buyer. However, some lenders may agree to release the seller from any personal liability if the buyer meets the lender’s qualifications.

Cash back

Cash back is an optional feature that provides you with a percentage of your mortgage amount in cash right away.

While it can help you pay for things you’ll need when getting a new home, such as legal fees or furniture, you usually have to pay a higher interest rate to get a cash back option on your mortgage. The interest charges you will pay due to a higher interest rate could cost you more than the money you receive as cash back.

The lender can impose certain restrictions on the cash back. You may not be allowed to use cash back funds as part of your down payment. If you decide to renegotiate, transfer or renew your mortgage before the end of the term, you may be asked to repay some or all of the cash back amount.

Shop around and ask about all the conditions before applying for cash back on a mortgage.


   

As licensed professional mortgage brokers, we know exactly what it takes to qualify you for a mortgage and we do more than just get you a great mortgage at a great rate, we will show you the way, too.

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