As a newcomer to Canada, you may be considering buying a home in your new country. It may be exciting to think about but where do you start?
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Understanding the various types of mortgages may help you make informed decisions. This article can help provide you with some helpful guidance, covering the basics, different mortgage types, and tips for a smoother mortgage experience.
Getting to Know Some of the Basics[1]
What is a Mortgage?
A mortgage is a loan that is a common way to finance the purchase of a home. It allows you to acquire the home without having to have saved the full purchase price in cash. It’s a promise you make to a bank or a lender for a certain number of years, to make consistent payments in order to pay back the loan, where the home serves as the security for the loan. A mortgage has an amortization period and regular payments that pay back both the principal (the amount of money you are borrowing for the mortgage) and interest charged on that principal. Amortization period is the length of time it would take to pay off the mortgage assuming there are no changes to the regular payment amount or interest rate.
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What You May Want to Consider When Getting a Mortgage
Several factors may be considered when selecting a mortgage. These may include:
- the interest rate offered by your mortgage lender,
- the term of the loan,
- the type of mortgage, and
- prepayment privileges
Understanding your Mortgage Term vs. the Amortization Period
It may be helpful to understand how your “mortgage term” is different from the “amortization period.”
A mortgage term is the length of time you’re committed to an interest rate with your mortgage lender. At every renewal, you may have a different interest rate.
This means your interest rate may not be the same for the entire amortization period. Many people choose an amortization period of 25 years. The longer the amortization period, the more interest you will pay over the life of the mortgage, but your regular payments may be lower.
How Mortgage Payments are Calculated
Mortgage payments are usually calculated based on the principal amount/balance, the interest rate, the amortization period, and the payment frequency. They typically include principal and interest components.
Understanding Prepayment Privileges[2]
Prepayment is different from a regular payment. A prepayment is on top of your regular scheduled mortgage payments and can be in the form of lump sum amounts or increasing your regular payments by a certain percentage. Prepayments pay down your mortgage faster and reduce your amortization period. As a result, they reduces the amount of interest you pay for the life of the mortgage.
Prepayment privilege is the maximum amount of prepayment you can do without paying a prepayment charge, and it will vary by lender and mortgage type.
Paying your mortgage in full before the maturity date is often referred to as “breaking your mortgage.” If you have a variable interest rate and closed mortgage, your prepayment charge is typically 3 months of interest. If you have a fixed rate and closed mortgage, your prepayment charge is typically the greater of a) three months’ worth of interest or b) the interest rate differential (IRD) amount. Depending on how much time is left on your mortgage term, the IRD can be a large amount, making it critical you speak with your mortgage specialists to understand the terms of your mortgage before you pay it out. Learn more about breaking your mortgage[3].
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How to Make Your First Mortgage Experience in Canada Easier
Consider Choosing Flexibility
Selecting a mortgage with flexible payment options may help you manage your finances more effectively. For example, TD Mortgages allow you to increase your payments. In addition, TD allows you to make lump sum prepayments up to 15% of the principal amount on a closed mortgage annually, or 100% on an open mortgage without prepayment charges. If you need to take an emergency break from your mortgage payments, payment pause allows you to request to skip the equivalent of one monthly payment with TD’s approval. Be aware that interest will continue to accrue during a payment pause. These features could help make it easier to pay off the mortgage faster or help you prepare for the unexpected.
Choosing a Mortgage That Might Be Right for You[1]
Selecting the right mortgage involves understanding your financial situation and future plans. You may wish to consult with a mortgage specialist who may be able to help you evaluate the different types of mortgages and their potential impacts on your finances.
Types of Mortgage Terms Available at TD
- TD Fixed Interest Rate Mortgage: This type of mortgage term maintains the same interest rate throughout the term of the mortgage. If you prefer to have stability in your mortgage interest rate, this may be a good option for you. You can choose from a different term lengths ranging from 6 months to 10 years.
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- Pros:
- Your mortgage payments stay the same throughout the term providing stability and predictability.
- You’ll have protection against interest rate increases during the term.
- Cons:
- If interest rates decrease during your term, your mortgage payments do not decrease.
- Pros:
- TD Variable Interest Rate Mortgage: This type of mortgage term has an interest rate that may fluctuate up or down throughout the term of your mortgage loan as the TD Mortgage Prime Rate changes. At TD, the variable interest rate mortgage has fixed payments during the 5 year term. Your principal and interest rate payments will stay the same for the term, but if the TD Mortgage Prime Rate goes down, more of your payment will go towards the principal. If the TD Mortgage Prime Rate goes up, more will go towards the interest. At a certain point, you may be required to make adjustments. In contrast, some other lenders offer adjustable variable interest rate mortgages where the regular mortgage payment will increase if the base rate increases.
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- Pros:
- You will pay less interest if the interest rates decrease.
- Cons:
- You will pay more interest if the interest rates rise.
- Pros:
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How Mortgage Choices May Affect One’s Future
Ultimately, the features of your mortgage may provide flexibility in the future if your financial situation changes. For example, you may be able to choose from open and closed prepayment options. In all cases, it may be best to consult your mortgage specialist.
Understanding Different Types of Prepayment Options[4]
Another important decision is whether to go with an open or closed prepayment term. The major difference between open and closed terms is the ability to make extra mortgage payments or payout your mortgage.
Here’s a breakdown of some of their pros and cons that may help simplify your decision-making process.
- Open Mortgage: Whether you have a fixed or variable interest rate, this offers flexibility to repay your mortgage principal amount at any time without any prepayment charges.
- Pros:
- No prepayment charges.
- Cons:
- Typically has a higher interest rate compared to a closed mortgage with the same term length because of the added prepayment flexibility.
- Pros:
- Closed Mortgage: Prepayments are permitted but prepayment charges will apply if you exceed the prepayment privilege which varies by mortgage lender.
- Pros:
- Usually has a lower rate compared to an open mortgage with the same term length.
- Cons:
- Limited flexibility in making prepayments.
- Charges if you exceed the permitted prepayment privileges.
- Pros:
By understanding the different types of mortgages and their features, new Canadians like you can make more informed decisions in pursuit of your financial goals. You may wish to take the time to research and seek advice from your mortgage specialist. That way, you can prepare for your journey to homeownership in Canada.
For personalized guidance on your mortgage options, request a call today from a TD Mortgage Specialist.
Why Choose TD?
150 years helping Canadians:
TD has a proud history of delivering financial solutions to Canadians for more than 150 years. TD also brings a century of experience helping newcomers navigate the unique challenges of the Canadian banking system.
With over a thousand branches, a reputation for excellence in financial services, and the ability to also serve you in more than 80 different languages, TD has become one of the largest and most trusted banks in Canada, now serving 16 million Canadians.
TD offers online support and resources of interest to newcomers on topics such as banking basics, moving to Canada, credit score essentials, and more. TD is open longer hours for your convenience and has thousands of ATMs across Canada to help you take care of your everyday banking needs quickly and easily.
Ready to Bank?
Learn more about TD New to Canada Banking Package today. Book an appointment to talk with a TD Personal Banking Associate about the TD New to Canada Banking Package. You can book online right away, or visit the TD website to learn more.
