Buying a home is the biggest purchase most Canadians will ever make, and with the high cost of real estate today, understanding the full financial commitment is critical.
TD Canada Trust breaks down three key home financing decisions for first-time homebuyers to consider: down payments (20% is the goal), mortgage options (it’s not just about the lowest interest rate possible) and accelerated payments (pay down more than you need to).
1. Down Payment: how much and how to finance?
There are many benefits to a larger down payment. For example, homebuyers with a down payment of greater than 20% do not have to obtain mortgage default insurance, the premium for which is calculated as a percentage of the mortgage and is paid up front or by adding it to the principal portion of the mortgage.
2. Mortgage Options: fixed or variable interest rate, open or closed term, flexible payment features?
A low interest rate isn’t the only factor to consider when choosing a mortgage. A mortgage specialist can help you navigate options like flexible payment features, and discuss monthly payment amounts in the context of your overall cash flow and future home-buying plans.
Fixed vs. variable interest rate
With a fixed interest rate mortgage, the interest rate and monthly payments do not change throughout the term of the mortgage and it’s clear upfront how much will be paid off at the end of the term. With a variable interest rate mortgage, the interest rate may fluctuate during the term. If interest rates go down, more of the monthly payment is applied to the principal, helping to pay off a mortgage faster. If interest rates rise, more of the monthly payment is applied toward interest. In addition, with a variable interest rate mortgage, you may be required to revise your payment arrangements at certain times.
Open vs. closed mortgage
With a closed mortgage, a homeowner agrees to a term anywhere from six months to 10 years. There are conditions that limit when a closed mortgage can be renegotiated or refinanced and there may be a prepayment charge for renegotiating early or paying off the mortgage prior to the end of the term. Often negotiated for a shorter term, an open mortgage can be paid off at any time without prepayment charges. While it offers greater flexibility in terms of repayment, the interest rate for an open mortgage may be higher than for a closed mortgage.
Flexible payment features
Some mortgages offer features that give homeowners added flexibility to react to changes in their financial situation. For instance, flexible mortgage options may allow homeowners to make prepayments on their mortgage when they can and then reduce their monthly mortgage payment or take a payment vacation for a short period of time when they need to.
3. Accelerated payments: how can a mortgage get paid down faster?
Homebuyers can pay off their mortgage faster and save money on interest by choosing a shorter amortization period or setting up an accelerated weekly or biweekly payment schedule instead of a monthly payment schedule. Prepayments are another way for homebuyers to pay their mortgage faster without locking into a payment schedule that could make it a challenge to manage their monthly cash flow. Many lenders allow mortgage holders to make prepayments up to a percentage of the original mortgage amount each year.