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In Canada and much of the modern world, home ownership has become an almost universal aspiration for those working to count themselves among the middle class.
The first mortgage dates back to late twelfth century England. At the time, mortgages almost exclusively involved a direct loan between a property’s seller and buyer for the sale price of the property, which included a simple, short-term repayment plan (short because the average life expectancy was around forty). Fast-forward eight or nine hundred years and the term ‘mortgage’, as it applies to modern finance, has morphed into an increasingly complex, and in some cases, mystifying, financial transaction.
So let’s try to provide some clarity. In the year 2019, in Canada, what is a mortgage and what are the most important things to bear in mind when exploring your options?
In the simplest terms, a mortgage is a type of loan used to buy a property. The property is then used for security of the loan. It’s normally a large loan and is paid off over many years. When obtaining a mortgage a down payment is generally required. These are universal standards for most mortgages in Canada and don’t vary much across lenders.
Where you begin to see variety is in the innumerable terms and customization options offered. Fixed versus variable. Open verses closed. Amortization periods. Interest rates. Repayment schedules and so on and so forth. Mortgages, as financial tools, have adapted to the needs of society over time and in our modern society, the ability to customize has become a priority for most consumers. This, in due course, has increased the level of sophistication required when settling upon mortgage terms.
For the sake of word count, however, we’ll do our best to simplify. Bells and whistles aside, the two most important deal points in any mortgage are the ‘mortgage term’ and ‘amortization’. Mortgage term is the length of time your mortgage agreement and interest rates will be in effect. Amortization is the length of time it will take to pay in full the amount of the mortgage loan. For example, a 25-year mortgage may have a term of 5 years (amortization can be as long as 30 years for some mortgages, but requires a minimum 20% down payment).
In selecting your term for the mortgage there are two different types of mortgages that one can obtain. ‘Open mortgages’, where you can make extra payments at any time. The other type, you guessed it, are ‘closed mortgages’, which will usually have a pre-payment charge to alter the mortgage throughout the term, such as lump sum payments, or refinancing to lower interest rates. Although, with customization being king in this day and age, most closed mortgages allow for some type of penalty free pre-payment as well.
Last up in mortgage basics is ‘interest rate’ and ‘payment types’. There are ‘fixed interest rates’ and ‘variable interest rates’. With a fixed rate, you agree to a certain “fixed” rate of interest for the entire term and your payment amounts are static and predictable. With a variable interest rate, the rate can change during the term and your payments increase or decrease accordingly. For the sake of budget stability, most buyers take advantage of a fixed rate, but either way, the key is to know what you need and what you can afford.
Thus concludes our novice primer on mortgages. If the preceding article hasn’t spooked you and you’re interested in more information, talk to a qualified professional about the various other ins and outs of modern home finance. Moreover, shop around until you find a mortgage provider that you feel comfortable with. Most people live with their mortgage longer than they do their own kids, so don’t settle for something that isn’t going to work for you or someone whose interests aren’t aligned with your own.
If you're interested in learning more about a mortgage through Lake View Credit Union, click the link below.