How to find a mortgage                                                 
Some important things to know when shopping for mortgages are your financial goals and your needs. Mortgages should be customized to your circumstances. Two types of mortgages are Conventional and High Ratio. 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 ranging from six months to 25 years.

Term: the number of months or years the mortgage contract covers, usually six months to 10 years. This is the time during which a mortgagor pays a specified interest rate.

Amortization: the actual number of years it will take to repay the mortgage in full. Most mortgages are amortized over 25 years; you can however choose a shorter period if you can afford it.

Equity: the difference between the amount for which you can sell your property and the amount you still owe on the mortgage.

Open vs. Closed Mortgages
Open: can be pre-paid or paid off at any time without penalty.

Closed: a set term and with fixed conditions. Usually the agreement allows pre-payment although a penalty may be charged. Most mortgages are closed as the rates are lower – however mortgages differ between lenders so be careful, not all mortgages are the same. All mortgages are fully open at the end of their term. This allows you to repay all or part of the outstanding principal without penalty on the maturity date.

Fixed Rate vs. Variable Rate
Fixed rate: a mortgage that carries a set interest rate for the term of themortgage. The payments are fixed and you are protected if interest rates rise. However, it could cost you more if the interest rates fall.

Variable rate: a mortgage that has a floating rate as interest rates rise and fall from time to time as the market conditions change. An open variable rate mortgage gives you the flexibility to make unlimited pre-payments or lock into a fixed term at any time. This type of mortgage is more popular when interest rates are low.

Rates have been very low for some time now however, they are expected to rise in the next several months. So pay attention to the current and future rate trends.

With variable rates payments remain the same so if interest rates go down, more of your mortgage payment will go to pay the principal; and if interest rates go up, less goes toward the principal. I was the Branch Manager of a Credit Union in the early 1980’s and was approving mortgages at 21% - Yikes!

It is still painful to even think about that, time so watch the rates carefully because your regular payment may not cover all of the interest owing. In this case, the unpaid interest will be added to the principal still owing and this can erode your equity.

Short-term vs. Long-term
You can set the term of your mortgage. Terms range from six months to twenty-five year mortgages.

Short–term: typically two years or less. The interest rate is usually lower.

Long-term: three years or more. The longer the term, the higher the interest rate. Benefits of long-term mortgages are the security of knowing exactly what your interest rate and payments will be for an extended period.

Some studies have shown that locking in for a longer term can cost you more money than if you renew every six months. This is largely due to the higher rate you pay on long-term mortgages. If interest rates are rising, or are expected to rise, it may make more sense to go long-term and lock in at prevailing rates.

Other features and options
Partial pre-payment: allows you to make extra payments against your principal. Most mortgages permit an annual lump sum payment or extra regular payments. This pre-payment is restricted to the anniversary date of your mortgage.

Compound interest: interest that is charged on the interest owing on your mortgage. The more frequent the compounding, the more interest you’ll pay. Most traditional mortgages have the interest compounded semi-annually. In the case of variable rate mortgages, interest is usually compounded monthly.

Increases in regular payments: payments can be made weekly, biweekly or semi-monthly this flexibility may help you budget better, and the more frequently you pay your mortgage, the more you’ll save on interest costs over time.

Portability: selling and buying - this option allows you to take your mortgage with you at the same term, rate and amount – and apply it to your new house. This option could save you thousands of dollars in penalties if you move to another home.

Assumability: Be very careful with this feature as it allows the buyer of your house to take over or “assume” your mortgage. In most cases, your lender will release you from your mortgage, meaning if the buyer defaults, you won’t be responsible for the payment.

However, if the buyer doesn’t meet the lender’s usual credit requirements, the responsibility could fall back into your lap. As provincial laws vary, check with your solicitor or notary.

Early Renewal: renew your mortgage before it matures - This strategy can be useful if you expect mortgage rates to increase and will allow you to change to a fixed long-term rate. However, if current interest rates are lower than your existing mortgage rate, you will likely have to pay a charge for renewing early. Different lenders may offer other features and options such as a convertible mortgage, blending and extending interest rates and interest rate buy downs.

If you are shopping for a mortgage I recommend that you use a mortgage broker – they are usually paid for by the financial institution that lends you the money - however they work for you and can save you thousands in interest charges.

In addition, mortgage brokers are better for your credit rating - they will only pull one credit check and show it to all the prospective lenders. Instead of each lender pulling your file – it will only be done once. Saving you precious beacon points!!!

Margaret H. Johnson ACE, RQIC is the leader in the field of Canadian credit counselling, she is the president of Solutions Credit Counselling Service Inc. and Women and Money Inc. www.creditsolutions.ca

Do you have a story that you would like to share about your experience with a debt collector? Email me mhjohnson@creditsolutions.ca

If you are experiencing financial difficulty, do not wait. Speak to the professionals at Solutions to day. Call Toll Free 1-877-588-9491

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