Mortgages can be complicated: and the terminology around them can seem completely unapproachable. When looking to invest in a future home, it is important to understand not only the different types of mortgages in Canada- but also how they work, so you’ll be readily equipped to invest in any type of home you want.
To start, let’s define a few basic terms. Canada has two types of mortgages to choose from: a fixed-rate mortgage and a variable rate mortgage.
When interest rates dropped to record lows a few months ago, a friend looked into options for decreasing their mortgage payment by getting a mortgage with a lower interest rate. Because she was locked into a fixed rate mortgage, the lender used the IRD calculation to determine the penalty for getting out of her mortgage. The penalty was a staggering $23,000.
If you have any reason to believe you might have to get out of your mortgage, you’re going to want to have a variable rate mortgage. If her mortgage would have been a variable rate mortgage, the penalty to break it would have been $3,900.
Another vital thing to understand about mortgages and the bank that gives you the mortgage, is the posted vs. discounted rates. Understand our How to Buy a Home associates are here to help you, but furthermore- understand you can usually find a better deal, and you’re not tied to a specific bank just because that’s the bank you usually do business with. Canada’s big banks will usually have a mortgage rate section that shows two rates, the “posted rates” and the “discount rates”. The posted rate is intended to make you believe you’re getting a good deal on your mortgage. What banks will do is give you the discounted rate to make you believe that they went down from their posted rate and gave you a great deal. Therefore, make sure to never pay the posted rate, as most of the time (if not all the time), that’s the highest rate offered.
It is imperative you know banks assume that if you’ve been their customer for a long time, you won’t stray from the bank. Most of the time, customers don’t, so they end up paying a bit more on their mortgage because they’re unaware they should be exploring rates further. Do not let this be you! It’s a good idea to always have a mortgage broker shop the best rates for you when its time for you to renew your mortgage.
We’re here to help: How to Buy a Home has a mortgage payment calculator you can use to determine what your payments would look like. Different banks may offer distinct interest rates also dependent on your credit score. We hope this information has been useful to you and don’t forget to reach out too our How to Buy a Home associates with any questions. We are here to help!