“A man travels the world over in search of what he needs and returns home to find it.” – George A. Moore
A home is a sanctuary, a comfort zone for many. It’s where one can relax, recharge and enjoy time with family and friends.
That is why it is a dream for many to have their own home. A place that they can arrange whichever way they want, a place to be themselves and something to call their own.
It’s a reward for all the hard work accomplished daily.
Dreaming of owning a home is easy; what can be challenging is the process to acquire one.
To purchase your own home, you will need to seek out a mortgage loan that works for you and your budget. Here, we break down the different mortgage loans that you can consider and the advantages and disadvantages of each:
A conventional mortgage is the most traditional type of mortgage. It involves the buyer coming up with the 20% down payment while the lender will provide the 80% payment for the purchase of the property plus interest.
Advantage: You will be paying less monthly (and maybe a shorter time period) because you were already able to shoulder the 20% down payment as opposed to paying more than 80% + interest.
Disadvantage: While it’s a good thing that you have money saved away for a down payment, you might need those funds in case of an emergency; make sure that when you use your savings as a down payment, that you still have other funds that you can use for a rainy day.
An open mortgage is an option where you have the freedom to pay the loan in full anytime that you want without any penalty charges.
Advantage: The term is shorter so if the borrower has some financial uncertainties they will have the freedom to reach maturity faster or refinance if they so choose
Disadvantage: The interest rate is higher compared to a closed mortgage simply because of the borrower’s option to pay off the full loan amount as early as they can; let’s be honest, the lender needs to profit a certain amount from every loan they give out.
Variable Rate Mortgage
The variable rate mortgage can be tricky. It is the type of mortgage wherein your interest rate highly depends on the current prime rate. Consider this:
If the Bank of Canada prime rate goes up, so too does your mortgage interest rate, and that means a smaller portion of each mortgage payment goes towards paying down the principal.
When the Bank of Canada prime rate goes down, so too does your mortgage interest rate, and that means your mortgage payment appends a larger portion to the principal.
Advantage: You are at the sole mercy of the prime rate. Although, rates for this type of mortgage is usually lower compared to a fixed-rate mortgage.
Disadvantage: There is uncertainty because you are relying on the prime rate staying the same when you started or for it to go lower.
A closed mortgage is a straightforward choice. You just settle on an interest rate and the loan term and that’s it. However, on the off chance that you might want to have your loan prepaid, refinanced or renegotiated, you’ll be subject to penalty charges.
Advantage: There is some comfort knowing that you know how much you need to pay per month and for how long. Plus! They usually have lower interest rates compared to an open mortgage.
Disadvantage: There’s no room for flexibility; if you want to make some changes to your terms, there’s a penalty to be paid.
A convertible mortgage is an agreement made at the beginning of a term that allows homeowners to change the type of mortgage during its term.
Some of the changes you can do is switching from a variable rate mortgage to a fixed mortgage or from an open mortgage to a closed one. However, this can only be done when you are using the same lender for the adjustments.
Advantage: You can monitor the prime rate and opt to change your loan to gain the upper hand.
Disadvantage: If you’re not educated and current with the fluctuations in the prime rate, you may not be able to fully maximize the use of a convertible mortgage.
If you are 55 years old and above, this mortgage loan is for you! A reverse mortgage gives you the advantage of borrowing money based on your home’s equity. You can receive money, either as a lump sum or as monthly payments.
Advantage: You can use the extra money for emergencies or income-generating businesses.
Disadvantage: While your home may continue to appreciate in value and offset some of the interest costs and loss of equity, interest will rapidly accumulate on the amount you borrow.
Still having some trouble with what to choose as your mortgage? Fret no more!