Guide to Mortgages in Canada

A mortgage is a real estate agreement, in which a loan is given, and property is used as collateral for that loan. If everything works out, and the loan is paid in full, the property will officially belong to the renter. A mortgage consists of 3 components, which are the principal, the interest, and the amortization period.

Principal:

The principal is the full price of the property, minus the down payment. It is essentially the amount of money you are borrowing from the lender of the house.

Interest:

Interest is the fee that lenders will charge to take out a loan with them. All loans come with interest: mortgages, student loans, and car payments all have it. Calculating interest varies from person to person, based on factors like income status and credit scores. These all add on to what is called the prime rate, which is the lowest amount of interest a bank will charge.

At the start of paying off your mortgage, the interest rate will be a significant amount. Fortunately, it will reduce in size as you pay off more of the principal amount.

Amortization:

The amortization period is the period of time in which you have to pay off the loan. In Canada, they can range usually between 10-35 years. Having a longer amortization will result in more time to pay off the mortgage, but also results in higher interest.

 

 

On top of these components, there are two different types of mortgages: fixed rate and variable rate.

Fixed Rate Mortgages:

Fixed rate means the interest rate is the same for the entire length of the mortgage. There will be a small premium on top of the interest rate, which is a small price to pay for the added peace of mind that a fixed rate mortgage provides. Fixed rate mortgages are good for people who like sticking to a consistent budget.

Variable Rate Mortgages:

Variable rate mortgages, or adjustable rate mortgages, have interest rates that can fluctuate depending on market conditions. Compared to fixed rate mortgages, variable rates tend to have a slightly lower interest rate overall, but  this can increase without any warning. If you don’t mind this happening, and can afford a changing budget, variable rates may be better for you.

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