How to choose a mortgage that works for you
Buying a home is a big, exciting decision. In addition to finding the perfect home, a large part of the equation is finding the perfect mortgage to suit your circumstances.
Not all mortgages are the same and the popular fiveyear fixed rate mortgage is not the only option, and in many cases is not the best choice. Here a few things to consider when you’re looking at getting a mortgage. Start with a budget Your income will often determine what you can afford. What monthly payment obligations do you already have? Personal loans or lines of credit? Car or credit card payments? Can you still accommodate your savings plans (retirement, children’s education, vacation, etc.)? Work with a professional to review your cash flow to make sure you are buying within your means, while still finding a home to call your own. Life circumstances Buying a home is also about more than affordability. Take a step back—where do you see yourself in the next five to 10 years? How does home ownership and having a mortgage fit with your plans and goals? Take the time to jot down your goals and understand your situation to ensure you are borrowing in a way that makes sense for your life. After all, your plans and goals are unique to you! Fixed or variable, open or closed? There are different kinds of mortgages, each with distinctive features. Depending on your stage of life, the structure of your mortgage can have benefits and drawbacks. A fixed rate mortgage offers a simple, peace-ofmind solution. If you’re looking for flexibility, an open mortgage may fit better with your lifestyle since it allows you to pay additional amounts toward the principal, or even pay it off entirely, without penalty.
A longer term fixed rate will insulate you for a longer period against interest rate increases and provide you with budget stability. A re-advanceable mortgage allows you to access the equity in your home (typically upon approval by your lender) for additional borrowing without the expense of having to reregister the mortgage.
Incorporating a home equity line of credit with your mortgage can provide you with a cost-effective way of financing renovations, large purchases, education costs, etc. by providing you with access to preferred rates and terms. It may be that the ideal solution is a combination of different mortgage types. When it comes to mortgages, the best choice is what’s right for you. The best advice is to work with an experienced, qualified advisor to help you determine the optimal combination for your needs.
Prepayment allowances and penalties, and portability
Two areas not often considered when shopping for a new mortgage are prepayment allowances and prepayment penalties. There is much confusion amongst borrowers around these two topics, as the terms vary widely amongst lenders and mortgage types.
While the interest rate garners most of the focus when shopping for a mortgage, many times the up-front savings via an attractive interest rate are negated (and then some) by onerous prepayment penalties. The thing about prepayment penalties is that they usually crop up unexpectedly — you planned to stay in the house for five years, but mid-term you are faced with an employment change, a marital change, a financial windfall, or other change in family circumstances that mean you no longer require the mortgage. You then learn from your lender that there will be a substantial charge, usually in the thousands of dollars, to pay off your mortgage early.
Make sure you compare the features offered by the different lenders in regard to making additional payments or payment in full when making your final mortgage decision.
In the end, it is important that you are aware of the different mortgage features and then rank them in order of greatest importance to you and your family. An experienced advisor like your Canadian Western Bank account manager can help you sort through the options to help you find the best mortgage for you.