Finding a new home or investment property with the help of a real estate agent can be an exciting time. However, choosing a home also means selecting a mortgage for that property. Mortgage selection is a major decision that requires a great deal of consideration before following through. This is especially the case with the current economic climate of rapidly changing interest rates. There are a number of factors and even risks when selecting a mortgage.
What is your risk tolerance?
Risk tolerance is the amount of risk you can endure, such as market volatility or stock price fluctuations. A financial adviser or broker may ask you a few questions if you open an account with a brokerage business or an investment company in person or over the phone. A few characteristics, such as your age, career, and family status, might help establish your risk tolerance. For example, the older you are, the less risky you may be with your assets. You might want to cash out sooner as you approach retirement, and you do not want to wind up with less money when you are not earning as much as you used to. Your risk tolerance influences the rest of your investing approach. This can be directly correlated with the type of mortgage you choose for your next home or investment property.
The mortgage process
It is generally a good idea to be pre-approved for a mortgage before looking for a home. You will know precisely how much you can afford to spend on a property once you have been pre-approved. You also lower your risk since you are less likely to make an offer on a property you can not afford. Being pre-approved can greatly narrow your home searching significantly. Making a list of goals and requirements is beneficial. That way, you can look at each house objectively and decide if it is perfect for you.
When you locate a house you like, you can make an offer that is inline with what you can afford. Once your offer is accepted, you would negotiate with your banker or mortgage broker to obtain mortgage approval. You will most likely be required to provide papers and information. If everything checks out, the lender will sign off on everything, and you will be free to remove the financing condition from your offer, if applicable.
Mortgage characteristics to consider
Insured, insurable, and uninsurable
When you have an insured or high-ratio mortgage, you must pay mortgage default insurance to safeguard the lender. As a result, most lenders provide the lowest mortgage rates on these products, though this is offset by the mortgage default insurance you will have to pay.
When you put down at least 20% on a property, you have an insurable or conventional mortgage. You are not obligated to pay mortgage insurance in this scenario. This saves you money, but because it is significantly riskier for lenders, you will almost always pay a higher mortgage rate than if you had an insured mortgage.
Uninsured mortgages are those that do not match the government’s criteria for being insured by any of the mortgage insurers. Home purchases above $1 million and 30-year amortizations are two examples. As a result, uninsurable mortgages often have the highest interest rates.
Term vs amortization
A mortgage term is the period of time that your mortgage’s terms and conditions are guaranteed. If you have a fixed-rate mortgage, your interest rate will remain constant for the term of the loan. The mortgage amortization is the length of time it will take you to pay off your mortgage completely. The normal duration in Canada is 25 years, but you can choose a shorter or longer period if you prefer, as long as you can pass specific tests.
Open or closed
An open mortgage allows you to repay the loan in full at any time during the duration of the loan. As a result, it usually comes with a higher mortgage rate. Open mortgages are only appropriate if you anticipate a large monetary gain or want to sell your home in the near future. A closed mortgage restricts how much extra money you may put toward your mortgage in addition to your regular mortgage payments. As a result, it often has a lower interest rate than an open mortgage.
Fixed or variable
With a fixed-rate mortgage, your mortgage rate and payment amount remain constant throughout the length of the loan. With a variable rate mortgage, your mortgage rate and payment may fluctuate over the term based on changes in the lender’s prime rate. Fixed mortgage rates are often higher than variable mortgage rates since you are paying for the security of knowing precisely what your mortgage rate and payment will be.
Other considerations when choosing a mortgage
Breaking a mortgage
Breaking a mortgage is usually the last thing on your mind when you sign up for one. However, a lot may happen within the typical five-year mortgage term. If you believe you may need to break your mortgage during the period of your mortgage, choose a lender and mortgage type with a smaller mortgage penalty. Variable rate mortgages often have smaller penalties than fixed rate mortgages. This can be especially important if you are considering moving in the near future and the current place is a short-stop to up-size or down-size.
Mortgage penalties
If you end up breaking your mortgage to buy a new property during your mortgage term, you may be able to avoid mortgage penalties by transferring your mortgage. Porting your mortgage entails taking your mortgage with you to your new home. Some lenders’ portability rules are more liberal than others. One lender may allow you only 30 days to move your mortgage, whilst another may give you 90 days. If portability is crucial to you, you should inquire about the specifics of a lender’s policy.
Which mortgage is best?
You may be asking yourself which mortgage is right for you and does a specific mortgage type inline with your own risk tolerance? There is no one size fits-all type of mortgage as it will depend on a number of factors that can include the economic climate, your earnings, and your degree of risk tolerance. As an example, if current interest rates are high you may want to consider a variable interest rate in hopes that rates eventually come down in the future. In contrast, you may not want to take the risk because of the potential forecast for increasing interest rates. You may be also looking at an investment property rather than a new home to live in. The type of home can also affect the mortgage you select. With the help of a real estate agent you can find a property that can fit your needs.
