If you’re looking to buy a home or property, you’ll probably need a mortgage – a large home loan. Because properties often run into the hundreds of thousands of dollars, most people don’t have the cash to purchase a home upfront.
Like any other loan, you’ll repay the amount you borrowed with interest over time. The interest you pay and the time it takes are things to think about. Here are some keys to buying a home that will help you make those decisions.
The Canadian federal government has set a down payment rate. Currently, home buyers have to put down 5% of the purchase price if the purchase price is $500,000 or less. Home purchases between $500,000 and $999,999 require 5% of the first $500,000 plus 10% for the portion of the purchase price above $500,000. If the property costs $1 million or more, 20% of the purchase price is required.
Many home purchasers put down more than the 5% minimum because they won’t need to borrow as much and they may avoid the need for mortgage loan insurance. If a home purchaser puts down less than 20% as a down payment, they are typically required to obtain insurance from the Canada Mortgage and Housing Corporation (CMHC) or another insurer. Because your mortgage is the difference between the purchase price and your down payment, this would require a down payment of at least $25,000 on a $500,000 house.
Buying a home gives you the ability to choose a mortgage term, which dictates how long you’ll be locked into your interest rate. Your term will need to be renewed at the end of its duration, which is generally five years. Knowing that you’re not locked into your rate forever is good news if you find yourself re-evaluating your goals or finances in a few years.
You will also choose your amortization period – the length of time you’ll have to pay it off. The longer the amortization period, the lower your payments will be, but the more you’ll pay in interest. Using our $500,000-home figure, see how the amortization period makes a difference:
|Mortgage amount||Amortization||Monthly payment||Total interest paid*||Amount of principal paid back after five years*||Percentage of your mortgage paid back after five years*|
* Assuming a constant annual interest rate of 4%
Open and Closed Mortgages
Some home purchasers like to have flexibility to make extra payments or pay off their mortgage completely before the term ends. An open mortgage allows you to do exactly that. It’s a great option for home buyers who plan to pay off their mortgage quickly or stay open to the idea of moving. Keep in mind that an open mortgage interest rate tends to be higher.
A closed mortgage often limits the amount of extra money you can put toward your mortgage each year but offers a lower interest rate. These are better for home purchasers who plan to keep their home for the entirety of their loan’s term or for those who want a lower interest rate.
Fixed or Variable Rates
As a home buyer, you have many great options when it comes to interest rates. Fixed interest rates stay the same for the entire term and are typically higher than variable rates, which start lower but can increase and decrease during your term in response to the prime rate. But these changes can be hard to predict. Between 2005 and 2015, prime rates caused interest rates to fluctuate between 0.5% and 4.75%