How to Choose the Best Mortgage Option
By Alterna Team
August 15, 2021

Getting your first home can be exciting and scary. Would you be able to get a good interest rate? How much will you qualify for? You are probably feeling nervousness and even frustration from the whole process. And navigating all the terms and conditions of a mortgage can be confusing and daunting. There are so many things to consider when choosing a mortgage. Working with an expert can help make this process easier. But before you do that, go through these 8 tips to understand what is best for you:

1. How much money can you pay towards homeownership?

Many first-time homebuyers forget that the cost of owning a home is not just making the mortgage payment. There are utility bills, taxes and ongoing maintenance and condo fees that need to be paid. Evaluate how much you can afford to pay for these expenses from your income and come up with a dollar figure.

2. What other commitments do you have?

Are you paying off a student loan or a credit card debt? Do you need to support your parents or other family members? Are you saving up for a trip or a wedding? You need to consider all these commitments to properly calculate how much money you can put towards homeownership.

3. Your credit history, credit score and employment status

These will determine your ability to qualify for a mortgage. If you have a steady income from your employment, and your credit history/score is good, you will be able to shop for the best deal.

4. Do you want flexibility and lower rates?

Are you are the kind of person who wants the flexibility to pay down your mortgage faster? This may be because you earn a big bonus, you are expecting a large sum of money, or if you plan to sell your home quickly. An open mortgage allows you to pay down your mortgage with lump-sum payments at any time without a penalty.

However, if you are looking for the lowest rates, then choose a closed mortgage that will typically have a lower interest rate. You can still pay 15%-20% of the original principal balance of the mortgage per calendar year without any penalties.

5. Are you ok with the risk of interest rates rising or do you want predictability?

When you opt for a variable rate mortgage, you get the advantage of paying a lower rate when interest rates go down. But the reverse can happen also. If you don’t want the stress and want to make sure your payments are steady, choose a fixed-rate mortgage.

6. How long do you want to take to pay off the mortgage?

Your amortization period is the amount of time it will take to pay your mortgage in full. Sounds like a lifetime, right? Keep in mind, the longer it takes you to pay your mortgage, the more interest you’ll pay. In Canada, the standard amortization period is 25 years. However, homeowners can also choose amortization periods as short as one year, or longer than 25 years. If you choose to go over 25 years, you could face an extra fee or require more than 20% down payment.

7. Select your mortgage term

Many people confuse mortgage terms with amortization periods. Your mortgage term is the length of time you commit to the mortgage rate. Terms can range from a few months to ten years. The five-year term is the most popular.

If you expect interest rates to decrease, you might decide on a short-term mortgage, whereas choosing a long-term mortgage can let you lock in an interest rate for a longer period of time. If you choose the long-term mortgage, you may not be able to make changes for several years without having to pay a prepayment penalty. The length of term you choose will not only depend on whether or not you think interest rates will rise or fall, but also on other lifestyle factors. It is best to speak with an expert before to ensure you choose the right term length for you.

8. Decide how often you'll make payments.

Your mortgage payment is divided into the principal and the interest, with your payment first paying off the interest. You can have several choices in terms of how often you pay your mortgage:

  • Monthly - one payment per month for a total of 12 per year

  • Semi-monthly (twice a month) - for a total of 24 payments per year

  • Biweekly (every two weeks) - for a total of 26 payments per year

  • Weekly - for a total of 52 payments per year

    Accelerated weekly and biweekly payments will help you pay off your mortgage faster. It helps make the equivalent of one extra monthly payment each year. This can save you thousands, or even tens of thousands of dollars in interest charges over the life of your mortgage

Alterna Savings' advisors are standing by to help you with all of the terms and conditions of your mortgage. Drawing on our experience and expertise, we’ll offer advice and recommendations, explain the pros and cons of your choices, and answer all of your questions. We’ll help you choose the mortgage that is right for you and your family; after all, we’re homeowners too.

Buying your first home in Canada?

This journey is an exciting one and we are here to help!