As a newcomer to Canada, you might be considering purchasing a home in your new country. While it’s an exciting prospect, you might be unsure where to begin.
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To help you get started, sign up for the upcoming webinar, Mortgage Basics: A Newcomer’s Guide to Financing a Home in Canada, and keep reading to learn more.
Understanding the different types of mortgages can help you make well-informed decisions. This article offers helpful guidance on mortgage fundamentals, various mortgage types, and tips to ensure a smoother mortgage process.
Understanding the Basics
What is a Mortgage?
A mortgage is a type of loan commonly used to finance the purchase of a home. It allows you to buy a property without needing to save up the entire purchase price in advance. Essentially, it’s a commitment made to a bank or lender to repay the loan over a set number of years through consistent payments. The home itself serves as collateral for the loan.
A mortgage consists of an amortization period and regular payments that cover both the principal—the amount borrowed—and the interest charged on that principal. The amortization period is the total length of time required to fully repay the mortgage, assuming the payment amount and interest rate remain unchanged.
Key Considerations When Getting a Mortgage
When choosing a mortgage, several factors come into play, including:
- The interest rate offered by the lender
- The loan term
- The type of mortgage
- Prepayment privileges
Understanding the Mortgage Term vs. Amortization Period
It’s important to distinguish between a “mortgage term” and the “amortization period.”
The mortgage term is the length of time you agree to a specific interest rate with your lender. At the end of each term, the rate may change. This means that your interest rate may not remain the same throughout the entire amortization period. Many people opt for a 25-year amortization period. While a longer amortization period results in paying more interest over time, it also means lower regular payments.
How Mortgage Payments Are Calculated
Mortgage payments are typically based on the principal balance, the interest rate, the amortization period, and the payment frequency. Payments usually include both principal and interest portions.
Prepayment Privileges
Prepayments differ from regular payments in that they are additional payments made on top of your scheduled mortgage payments. These can be lump sums or increased regular payments, helping you pay off your mortgage faster and reduce the amortization period, ultimately lowering the total interest paid.
Prepayment privileges refer to the maximum prepayment amount allowed without incurring a penalty, which varies by lender and mortgage type.
Paying off your mortgage early—often called “breaking your mortgage”—can result in penalties. For a variable-rate closed mortgage, the penalty is typically three months of interest. For a fixed-rate closed mortgage, the penalty is generally the greater of either three months’ interest or the Interest Rate Differential (IRD). The IRD can be significant depending on how much time remains in your term, so it’s crucial to consult your mortgage specialist before making an early payout.
How to Make Your First Mortgage Experience in Canada Smoother
Consider Opting for Flexibility
Choosing a mortgage with flexible payment options can help you manage your finances more effectively. For example, TD Mortgages offer the ability to increase your payments. Additionally, TD allows lump sum prepayments of up to 15% of the principal amount annually on a closed mortgage, or 100% on an open mortgage without penalty. In case of financial emergencies, TD’s payment pause option allows you to skip the equivalent of one monthly payment with their approval, though interest will still accrue during this pause. These flexible features can help you pay off your mortgage faster or provide financial relief during unexpected situations.
Choosing the Right Mortgage for You
Selecting the best mortgage for your needs requires understanding your financial situation and future goals. Consulting with a mortgage specialist can be helpful, as they can guide you through different mortgage options and explain how each one might affect your finances
Mortgage Terms Offered by TD
TD Fixed Interest Rate Mortgage
This option locks in the same interest rate for the entire term of your mortgage. If you prefer the security of knowing your interest rate will not change, this could be a suitable choice. TD offers term lengths ranging from 6 months to 10 years.
Pros:
- Your mortgage payments remain the same throughout the term, providing stability and predictability.
- You’re protected from potential interest rate increases during the term.
Cons:
- If interest rates decrease during your term, your mortgage payments will not go down.
TD Variable Interest Rate Mortgage
With a variable interest rate mortgage, the interest rate may fluctuate based on changes to the TD Mortgage Prime Rate. At TD, the payments remain fixed for a 5-year term, but if the prime rate decreases, a larger portion of your payment goes toward the principal. Conversely, if the prime rate increases, more of your payment will go toward interest, and you may need to adjust your payments. Other lenders may offer adjustable variable rate mortgages, where payments increase when interest rates rise.
Pros:
- You will pay less interest if rates decrease.
Cons:
- If rates rise, you will end up paying more interest.
How Your Mortgage Choices Can Impact Your Future
The features of your mortgage can provide flexibility, especially if your financial situation changes in the future. For example, you might have the option to choose between open and closed prepayment terms. It’s always a good idea to consult with a mortgage specialist to determine the best option for your circumstances.
Understanding Prepayment Options
When choosing a mortgage, one key decision is whether to opt for an open or closed prepayment term. The primary difference between these options lies in your ability to make extra mortgage payments or fully pay off your mortgage without penalties.
Here’s a quick overview of the pros and cons of each:
Open Mortgage
An open mortgage, whether it has a fixed or variable interest rate, provides flexibility to repay your mortgage principal at any time without incurring prepayment charges.
Pros:
- No prepayment penalties, offering maximum flexibility.
Cons:
- Generally comes with a higher interest rate compared to a closed mortgage with the same term, due to the additional repayment flexibility.
Closed Mortgage
With a closed mortgage, you can still make prepayments, but you’ll face charges if you exceed the prepayment limits set by your lender.
Pros:
- Typically comes with a lower interest rate compared to an open mortgage with the same term.
Cons:
- Limited flexibility for making extra payments.
- Prepayment charges apply if you exceed the permitted limits.
Making Informed Decisions
By understanding the different types of mortgages and their features, new Canadians can make better decisions that align with their financial goals. Take the time to research and seek advice from a mortgage specialist to ensure you’re well-prepared for homeownership in Canada.
For personalized assistance, you can request a consultation with a TD Mortgage Specialist to explore your mortgage options.
Why Choose TD?
Over 150 Years of Service
TD has been providing financial solutions to Canadians for over 150 years and brings decades of experience in helping newcomers navigate the Canadian banking system.
With more than a thousand branches, a reputation for excellence in financial services, and the ability to assist customers in over 80 languages, TD has become one of the largest and most trusted banks in Canada, serving over 16 million Canadians.
TD offers online resources for newcomers, covering topics such as banking basics, building a credit score, and settling in Canada. For added convenience, TD has extended hours and thousands of ATMs across the country to help you manage your everyday banking needs quickly and easily.
Ready to Start Banking?
Learn more about the TD New to Canada Banking Package today. You can book an appointment online to speak with a TD Personal Banking Associate or visit the TD website to explore your options.
Legal Disclaimer:
The information provided by TD Bank Group in this article is believed to be accurate and reliable when published, but accuracy cannot be guaranteed at all times. This information is for informational purposes only and does not constitute financial, legal, accounting, or tax advice. Always consult with professionals before making any decisions. All products and services are subject to the terms of their respective agreements. The information in this article is subject to change without notice.
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