A quick guide to mortgage choices for new homebuyers

When embarking on the exciting journey of buying a home, one of the most crucial decisions you’ll make is choosing the right mortgage. Your mortgage will impact your finances for years to come, so it’s essential to understand the options and features available. Here are a few things to keep in mind:

1. Understanding mortgage terms and penalties
A mortgage term is the length of time your mortgage contract is in effect, which includes the interest rate and other relevant conditions. Terms can range from a few months to several years. It’s essential to consider the impact of the mortgage term on your interest rate and the prepayment penalties for things like paying extra or transferring your mortgage to a new bank. These penalties can be very costly.

2. Mortgage flexibility: Open vs. closed mortgages
When considering a mortgage, homebuyers have the option of open or closed mortgages, each offering different levels of flexibility.

Open mortgages:

  • Higher interest rates compared to closed mortgages
  • Suitable for those who plan to pay off their mortgage quickly, sell their home soon or expect extra funds for prepayment

Closed mortgages:

  • Lower interest rates than open mortgages
  • Limitations on prepayment privileges, varying from lender to lender
  • Ideal for homebuyers who intend to stay in their home for the entire term and want a stable mortgage plan

You also need to choose between a fixed interest rate, which stays the same for the entire term, and a variable interest rate, which can increase and decrease during the term.

3. Portable mortgages
A portable mortgage allows you to transfer your existing mortgage to a new property when selling your current home and purchasing another. This feature can be beneficial if you have favourable terms on your current mortgage and want to avoid prepayment penalties.

4. Assumable mortgages
An assumable mortgage allows a buyer to take over – or assume – the existing mortgage of the seller, with the terms staying the same. This can be a good option if interest rates have risen since the original mortgage was acquired or if the sellers want to move to a less expensive home without incurring prepayment fees.

5. Standard and collateral charges
When taking out a mortgage, lenders may use standard or collateral charges to secure the loan against your property. Understanding the differences between the two is vital, as it impacts the types of loans you can secure against your property.

Standard charge:

  • Secures only the mortgage amount
  • Does not secure any other loans with the lender

Collateral charge:

  • Allows you to secure multiple loans, including a mortgage and a line of credit, with your lender
  • Registered for an amount higher than the mortgage, offering the option to borrow additional funds in the future

For more information to help you understand the various mortgage options, visit canada.ca/money

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