Welcome to part two of my Mortgage 101 blog series. In this post I will be answering some more commonly asked questions about mortgages, particularly about mortgage terms and what types of mortgage rates are available to Canadians in the home buying process.
What is a mortgage term?
A mortgage term is the length of time that you are locked in to paying your mortgage on a fixed or variable rate. Most mortgage terms are five years long but you can also get longer terms. Right now, ten-year mortgage terms are attractive to home buyers because of the lower interest rate right now.
What’s the difference between fixed and variable mortgage rates?
A fixed mortgage rate means that your interest rate and mortgage payments will be the exact same for the length of your mortgage term. It is stable and means that regardless of whether mortgage rates raise or fall, you won’t be impacted by it. A variable mortgage rate means that your mortgage payments will rise and fall depending on the “prime rate,” which is the market interest rate. This means that some months your payments might be higher while some months it might be lower.
So which is better?
More than 60% of Canadians elect for fixed mortgage rates, generally to reduce financial anxiety that can come with a variable rate. However, variable rates actually tend to be cheaper over time. Choosing which is best for you depends on the current rates at the time you take out your mortgage and whether rates are projected to rise or fall during your mortgage terms. But if you’re the type of person who will rest easy knowing exactly what your mortgage payment will be for the next few years, fixed might be the option for you.
What is mortgage default insurance?
This type of insurance is required for Canadians who put down less than 20% for their down payment on a home. If you can’t put down 20%, you are seen as riskier so it protects the bank and money lenders if you default on your mortgage. Default insurance is generally between 1.75% and 2.95% of your mortgage amount – which is paid for in addition to your monthly mortgage payment.
Do you have a question about mortgages that I didn’t cover? Leave me a comment and I’ll get back to you ASAP!Posted by Greg Dewar on