Mortgages 101: A Beginner’s Guide

Buying a home is one of the biggest decisions you’ll make with your money. But not everyone has the money to pay for a house in full at once. This is where a mortgage comes into play. Implemented after The Great Depression to help stimulate the economy, mortgages help just about anyone increase their wealth. Before mortgages, a buyer had to provide a 50% down payment with the remaining loan from the seller. Now, banks and other lenders ask for a cool 20% down payment and charge interest on your remaining balance. But what makes up a mortgage? Here’s everything you need to know about mortgages, mortgage rates, and what’s considered for you to get one.

What Is a Mortgage?

Basically, a mortgage is a type of loan you can get to help you buy a home. The standard is you save up at least 20% of the total house price and your lender pays the rest. When you purchase a home, you essentially use the loan to buy the property outright. Then once the deal is settled, you make your agreed-upon regular mortgage payments. If for some reason you fall behind on your payments, the lender (most commonly a bank) can reclaim your property.

What Are the Types of Mortgages?

There are three types of mortgages: insured or high-ratio mortgages, insurable or conventional mortgages, and uninsurable mortgages.

Insured or high-ratio mortgages require you to pay for mortgage default insurance. This insurance protects the lender while offering their lowest mortgage rates. However, this lower rate is offset by the mortgage default insurance that you’ll pay.

Insurable or conventional mortgages require you to make at least a 20% down payment on a home. In this case, you don’t need to pay that mortgage default insurance. This type does save you money in the long run. But you’ll most likely pay higher mortgage rates (compared to insured mortgages) because they’re riskier for the lender.

Uninsurable mortgages don’t meet the government guidelines to be eligible for any mortgage insurance plans. For instance, if you purchased a home for over $1 million and have a 30-year amortization (payment schedule) wouldn’t be eligible for insurance. For this reason, uninsurable mortgages like these tend to come with the highest mortgage rates.

Term v. Amortization

A mortgage term is the length of time your mortgage’s terms and conditions are guaranteed. If you have a fixed-rate mortgage, your mortgage rate will stay the same throughout your term.

The mortgage amortization is how long it’ll take you to pay off your loan. Canada’s standard length is 25 years, but there’s nothing stopping you from getting a longer or shorter term. If you didn’t go with the typical 25-year mortgage, you’ll probably have to pass a stress test first.

Open v. Closed

An open mortgage lets you repay your mortgage fully at any point during your mortgage term. But, it typically comes with a higher mortgage rate. Open mortgages really only make sense if you expect a huge cash windfall or intend to sell your home in the near future.

A closed mortgage limits how much you can put towards your mortgage loan repayments beyond what you’re already contributing. This means, it typically comes with a lower mortgage rate than a closed mortgage.

Fixed v. Variable

We’ve already touched on this a little bit, but here’s a refresher. 

A fixed-rate mortgage just means your payment amount and mortgage rate won’t change during your mortgage term.

Alternatively, a variable rate mortgage means your rate and payments may change depending on your lender’s rates.

What Are the Components of a Mortgage?

Your mortgage payment will consist of four different elements: 

  • Principal. The amount applied to the outstanding balance of the loan.
  • Interest. The amount of the charge for borrowing money.
  • Taxes. 1/12th of the estimated annual real estate taxes on the home.
  • Insurance. 1/12th of the annual homeowner’s insurance premium. This figure will include flood insurance and private mortgage insurance (PMI) if it’s required.

What Types of Mortgage Rates Are Available?

The interest rate is the fee you pay to the lender for the loan you need to buy your property. This means the higher your interest rate is, the larger your regular payment will be. But, you can negotiate your interest rate when it’s time to renew your mortgage term.

Your lender is the one who provides you with an interest rate. When you’re negotiating your mortgage term, your lender will consider:

  • the length of your mortgage term
  • their current prime and posted interest rate
  • if you qualify for a discounted interest rate
  • the type of interest you choose (fixed, variable or a combination)
  • your credit history
  • if you’re self-employed

Lenders typically offer higher interest rates when the term length is longer but it’s not always the case.

There you have it! A large overview of the basic terminology and requirements for receiving a mortgage from a certified lender. If getting a mortgage feels out of reach to you, don’t worry! Solid Ground Mortgage Solutions is well within your reach. We will get to know your current situation and provide you with steps so you can find a place to call home.

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