Choosing the Right Mortgage:

Naturally, you want to know how low a mortgage rate you can get, when you look for a mortgage. However, a seasoned professional will tell you a low mortgage rate is not the only criteria. There are many other factors borrowers need to consider when they pick a mortgage.

The over-riding consideration should be whether a particular mortgage product meets your particular needs. Those needs, of course, will have to include your ability to repay and your credit rating. Getting a mortgage is the biggest financial commitment you will ever have. So, it is important to get it right in the first place.

There are many mortgage products, programmes, companies and lenders to choose from. That can make the mortgage market for most of you incredibly confusing. Let’s start with terms.

The term of a mortgage is not the same as the amortization. A 25-year amortization means the mortgage will be repaid in full in 25 years based on the original interest rate. A mortgage with a 5-year term and 25-yr amortization means it will become due in full in 5 years, even though at the end of the 5th year, it will still take another 20 years for the mortgage to be repaid in full. So, what happens then? At the end of the 5th year, if the lender is happy with the way you have handled the payments, the lender usually will allow you to renew the mortgage with them at a different interest rate with a choice of different terms. The renewed amount will amortized over the remaining 20 years.

What happens if you need to repay the mortgage early before the term is up? Unless you have an open mortgage (as opposed to a closed one), you will be required to pay a penalty. For fixed rate mortgage, the penalty is invariably the higher of 3 months’ interest or the Interest rate differential (the IRD). In times of low interest rates, the IRD can be very, very, high. With closed variable (or adjustable) rate mortgages, the penalty is usually just 3 months’ interest. Some lenders will provide a pre-payment benefit of 15 to 20%, meaning you don’t have to pay a penalty if your prepayment in a year is less than the benefit allowed.

Do you know most people will refinance due to changes in life circumstances between 3 to 4 years? They may end up paying penalties. So why take out a 5-year term mortgage? Most people do that because every one else is doing so, without thinking a bit ahead and figuring out a financial plan.

In order to help you choose the right mortgage, I will go through what your financial needs are. Then I will help you choose between a fixed or variable rate mortgage, open or closed (look out for the closed/closed ones), terms and amortization, and different features like: pre-payment benefits, portability, cash-back, etc.

Or perhaps you really need a secured line of credit with interest payments only and open term, instead of a mortgage!