Shopping for a Mortgage
When shopping for a mortgage, keep your goals and needs in mind. There are many options, and a mortgage can be customized for your own circumstances. Make sure you understand the mortgage contract, which takes time read and understand. Canadian banks have recently taken steps to make this easier for you by redesigning their mortgage contracts so they use plain language.
Types of mortgages include uninsured low ratio or conventional mortgages and high ratio mortgages. Then there are a variety of features and payment options to consider. Mortgages are available on a closed or open basis, at fixed or variable rates and can have various terms generally ranging from six months to five years, but some institution will offer seven or 10-years terms. Generally, most mortgages are amortized over 25 years.
Open vs. Closed
With an open mortgage, you can pay off as much of your debt as you wish, whenever you want, without being charged a pre-payment fee. This could allow you to pay off your mortgage more quickly (assuming you have the cash flow to do so), potentially saving you thousands of dollars in interest over the life of the mortgage. An open mortgage can be a good option if you want flexibility. For example, if you are considering selling, or you are expecting to receive an inheritance settlement. You can expect to pay a higher interest rate for this flexibility.
With a closed mortgage, you get a more favorable interest rate for agreeing to keep the mortgage for the full term. It is for a set term and has fixed conditions. In some cases, the agreement allows pre-payment, although a fee may be charged. While most closed mortgages in Canada do offer a range of no-fee, partial pre-payment privileges, options differ between lenders. If your income is static, and you want the security of guaranteeing your monthly payments over a fixed period, a closed mortgage may be right for you.
All mortgages are fully open at the end of their term. This allows you to repay all or part of the outstanding principal without incurring any pre-payment fee on the maturity date.
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