If you are investing in a property and need to work out the best mortgage plan for your specific needs and financial situation, this guide is here to help. First, it will be laid out in simple terms what a mortgage is and the various terms you will need to be familiar with to understand the implications and expectations that come with different mortgage plans.
Then you can compare open and closed mortgages, and consider the all-in-one mortgage option, which is like a compromise between the two prior models. Hopefully, this will give you an idea of how to proceed with your financial planning.
What Is A Mortgage?
Before diving into the different types of mortgage plans available to you, let’s first be clear on what a mortgage loan is and what the implications are. A mortgage is an agreement between you (the borrower) and a mortgage lender when you want to buy or refinance a property but do not have all of the cash upfront. The agreement is that if you do not manage to pay back the money you borrowed, plus interest, the lender can seize the property.
Interest Rate
The interest rate is the cost you pay each year to borrow the money, expressed as a percentage. With a fixed mortgage rate, the rate and amount you pay each month will remain the same for the full term of your mortgage. A variable-rate mortgage, by contrast, means that the mortgage rate will change with the prime lending rate as set by your lender.
Fixed mortgage rates provide more stability, while variable rates are less predictable and can cause budgeting anxiety. However, a fixed rate will generally be higher than a variable rate, so you need to consider whether you think it is worth paying more for the predictability of a fixed rate, or whether you prefer a generally lower but fluctuating rate.
When interest rates are low and not expected to fall further, it is generally recommended to lock in a fixed mortgage rate. However, if you expect with some certainty that the interest rates will drop, you are better with a variable mortgage rate as it will get the benefit of paying lower rates.
An open mortgage will generally have a much higher rate than a closed mortgage. More on open and closed mortgage plans are below.
Annual Percentage Rate
The annual percentage rate (APR) of your mortgage is the yearly rate charged for a loan. The APR provides borrowers with a bottom-line number that they can compare among lenders, credit cards, or investment products. However, be aware that the APR may not reflect the actual cost of borrowing because lenders have quite a lot of leeway in calculating it, excluding certain fees.
Loan Term
The loan term of your mortgage is the length of time you are committed to a contract, which incorporates the mortgage rate, lender, and conditions set out by the lender. The loan term can be six months to ten years in Canada but is most typically five years. The amortization period is how long you have to pay off the entire mortgage. Generally, in Canada, this is twenty-five years, but can be as many as forty-five years.
Open Vs Closed Mortgage
An open mortgage can be one hundred percent paid off at any time, without any penalty. This is the option that offers maximum flexibility. However, as stated, an open mortgage can have a much higher rate than a closed mortgage.
Generally, it is preferred by borrowers to have a closed mortgage with lower rates. The good thing about closed mortgages is they still can offer a degree of flexibility. Over 99% of Canadians end up choosing closed mortgages.
As of January 2022 in Canada, a fully open mortgage typically has a rate of 2.99% – 4.99%.On the lower end of this rate spectrum, you will find variable mortgage rates, while the higher end is likely a fixed-rate mortgage.
At Altura Financial, in Canada, as of January 2022, a 5 year fixed closed mortgage is averaging 2.49%. At present, variable mortgage rates are priced roughly the same as fixed mortgage rates because it seems that variable rates will not be increasing any time soon.
All In One Mortgage
A great alternative to an open mortgage is the Home Equity Line of Credit (HELOC) mortgage, also known as an all-in-one mortgage. If you want a financial plan with flexible options, you can consider a HELOC plan. It will generally have a portion that is a closed mortgage, at a lower closed rate (such as 2.79% on the base section of the mortgage), and then a portion that is a home equity-based credit line. All in one mortgage allow homeowners to pay down more interest in the short-term while giving them access to the equity built up in the property.
A HELOC is very similar to an open mortgage because it can be paid in full at any time, without penalty. On the other hand, it can also be withdrawn in full at any time. The option to withdraw funds from your HELOC is not available with an open mortgage, making the all in one option more flexible. Because the closed portion of the HELOC mortgage is smaller, if you decided to completely pay off the mortgage, there is a smaller penalty to pay out the closed portion.
Know Your Mortgage Options
The best piece of advice to give on mortgage planning is to know your terminology and varying options. Before you commit to an open mortgage, a high-interest rate, or a longer loan term, you should know what the averages are, what is most suitable for your needs, and have the ability to compare mortgage lenders.
Once you have grasped the basics and are comfortable in your knowledge of what an all in one mortgage is, what rates you would like to be paying, and how long your amortization period is likely to be, you will be ready to make a well-informed, smart financial choice.
