Mortgages
Mortgages—the fundamentals
A mortgage is a loan that can help you finance the purchase of your home. Technically speaking, a mortgage is a legal agreement in which property is used as security for the repayment of a loan. If all of the terms of the mortgage are met, the borrower will own the property outright by the end of the specified period—usually 25 years, but it could be less time. Unless you have hundreds of thousands of dollars saved up, you’ll probably need a mortgage. The vast majority of New Brunswickers do.
Dissecting a mortgage
The main components of the typical mortgage are the principal, the interest, the amortization period, and the term.
Principal
The amount of money that you’re borrowing from a lender. It’s the sale price of the property minus your down payment (which is the amount of money you pay upfront to purchase a home).
Interest
The fee you're charged for the loan. The interest you pay is added to your principal, so you're always paying the bank more than you borrowed. The amount of interest you pay depends on many things, including the prime rate, your personal credit score, and your income level.
Amortization
The time period during which you make payments in order to pay off your loan. In Canada, the typical amortization period is 25 years, but it can be as high as 30 years. The amortization period is different from the “term” of the mortgage. Your amortization period will be made up of multiple terms.
Term
The mortgage term is the length of time you commit to the interest rate, lender, and terms and conditions. Think of your term as a “refresh button” on your mortgage. When the term is up, you then renew your mortgage, based on the remaining principal, at a new interest rate. Mortgage terms are typically anywhere from one year to ten years long.
Fixed-rate vs variable-rate mortgages
With fixed rate mortgages, the interest rate is locked in when you get the loan and it doesn't change over the term of your loan. With a variable rate mortgage, the interest rate may go up or down over the course of your term.
Which is better? It depends on your risk tolerance, and what you believe will happen to interest rates. Some people value the stability of knowing their rate will remain the same every month, which makes monthly budgeting easier and more consistent. However, you could end up paying more interest. With a variable rate mortgage, the interest rate can fluctuate month to month, so if rates drop, you pay less interest. Of course, if rates go up, your monthly payment goes up too.
Open vs closed mortgages
An open mortgage, as the name implies, leaves you “open” to make additional payments without penalty. This gives you the option of paying off your debt quicker by making extra lump sum payments or accelerated payments.
With a closed mortgage, on the other hand, you’re much more restricted from making such additional payments before your term is up. Some closed mortgages charge a large penalty if you pay it off before the term ends. Other closed mortgages set a prepayment limit that you can't exceed.
Which is better? Generally, the added flexibility you get with an open mortgage will cost you—open mortgages typically have slightly higher interest rates than closed mortgages.
Pre-qualification and pre-approval
Before you begin house hunting, you should know how much money you’re likely to be able to borrow. A lender will pre-qualify you for a certain-sized mortgage based on your assets, income, and debts. Meet with a bank (or other lender) or your mortgage broker to begin this process.
Mortgage brokers
Mortgage brokers and mortgage associates are licensed professionals who can help you negotiate and navigate the complicated process of getting a mortgage.
They do not actually lend money—rather, they act as an intermediary between a borrower and a lender. A mortgage broker or associate can act for either the borrower or the lender, but not both.
When acting on behalf of the borrower they essentially shop around to different lenders on the borrower’s behalf.
In New Brunswick, these individuals must be licensed with the Commission and must meet certain education requirements prescribed by the Commission.