There’s a lot to know when it comes to buying and owning a home. If you’re buying a home for the first time, there can be a lot to wrap your head around. At Alterna Savings, we’ve got you covered through your entire home-buying journey.
We know that there is a lot of information on the internet, and friends and family members are flush with mortgage advice, insights and tips and that can make making sense of it all difficult and even overwhelming – especially when it comes to figuring out mortgage “jargon.”
At Alterna Savings, our goal is to make your mortgage research process as simple, stress-free and satisfying as possible. And that’s why we’re pleased to provide you with an overview of some common mortgage terms and what they might mean to you.
An open mortgage allows you to pay back (in addition to your regular payments) any amount toward your mortgage at anytime. While this can help you pay off your mortgage sooner, open mortgage interest rates are higher than closed mortgage rates. Open mortgages can have both fixed and variable rates, depending on your financial institution.
A closed mortgage doesn’t let you pay back any amount towards your mortgage at anytime. However, depending on your mortgage agreement, you may be able to make extra (i.e. non-scheduled) payments at certain times, and up to certain amounts. These extra payments are called ‘allowable prepayments.’ Closed mortgage interest rates are generally lower than open mortgage interest rates, but you’ll incur a penalty for paying your mortgage off early.
A variable mortgage has a fluctuating interest rate, which means that while your payments remain the same each month, the amount that goes towards principal vs. interest will change based on the interest rate. This can either extend or decrease the life of your mortgage. A variable mortgage can be a good option if you think that interest rates will remain the same or fall during the life of your mortgage.
A fixed mortgage gives you “peace of mind” in knowing that you’ll be paying the same amount towards principal and interest each month, regardless of what happens with interest rates. A fixed mortgage can be a good option if you think that mortgage rates will rise, or if you simply want cost certainty.
High Ratio Mortgage:
A high ratio mortgage is the term applied to a mortgage when the amount borrowed is more than 80% or more of the appraised value or purchase price of the property (whichever is less). High ratio mortgages can be risky because of the small amount of equity in the home, so you will be required to pay a default insurance premium. On the other hand, a high ratio mortgage can help you move into a great next house, or make the transition from renting, sooner instead of later. A high ratio mortgage must be insured by the Canada Mortgage and Housing Corporation (CMHC) or a private company, like Sagen.
Home Buyers Plan (HBP):
The Home Buyers' Plan (HBP) is a Federal government program that allows you to withdraw funds from your RRSPs for the purpose of buying or building a qualifying home. The withdrawal limit is $35,000 per year, and the amount must be repaid back into your RRSPs over a 15-year period. Learn more about the HBP here.
Mortgage Payment Schedule:
The mortgage payment schedule refers to the frequency of your mortgage payments. The standard schedule is monthly. However, many of our members take advantage of a weekly or bi-weekly payment schedule to save thousands in interest and end their mortgage years sooner.
Mortgage Stress Test:
To qualify for a mortgage loan, you will need to pass a “stress test” to ensure you can afford payments at an interest rate typically higher than the actual rate in your mortgage contract. This is designed to help homebuyers not take on too much debt and have the means necessary to make their mortgage payments if interest rates rise or income decreases.
At Alterna Savings, we’re here to help make your mortgage research and decision-making process easy and rewarding. Contact us today at 1.877.560.0100 or visit us online at www.alterna.ca to get the clear and honest mortgage information, advice and answers you need.