Variable? Fixed? Open? Closed? There’s so much to consider when choosing your first mortgage, and all that pressure can be stressful. It’s a huge commitment, and choosing the right mortgage can help save your thousands – even tens of thousands.
Knowing your options and how they’ll affect your rates will make the decision clearer. That’s why The MacDonald Property Group is here. We’ve broken down all the main factors you should consider, so you can select the mortgage that suits your lifestyle, budget, and plan.
What should you consider when choosing your mortgage?
Choosing the right realtor can be a huge help when you’re buying your first home. Our experienced Ottawa realtors at The MacDonald Property Group will walk you through every step of the process and help you decide which options are best for you.
When considering a mortgage, a few factors will affect how much you’re paying and how long it will take to pay off your mortgage. Your realtor will walk you through all of these elements:
- Amortization period
- Length of terms
- Open or closed
- Interest rate
Let’s take a closer look.
An amortization period is just a fancy way of saying the entire length of your mortgage. You can opt for a shorter amortization period to pay off your mortgage more quickly, but this means your regular repayments will be higher.
On the other hand, you can choose a more extended amortization period to trim your annual payments. The only catch is that you’ll end up paying more in interest with a longer amortization period.
There’s another catch – if your down payment is less than 20% of the cost of your home, the longest amortization period you can get is 25 years. If you want to trim down your monthly payments by extending your amortization period, you’ll have to cough up at least 20% of your home cost upfront.
Length of terms
Your amortization period is broken up into multiple terms.
A term is the length of time your contract is in effect and can last anywhere from a few months to ten years. You’ll have to renew your mortgage contract at the end of every term, which may include different conditions on your contract.
How ‘short’ is short-term? Any length of time under five years is considered short-term. Most homebuyers will go with short term because it means they’re not confined to the terms of their mortgage contract for too long, and they tend to have a lower interest rate.
If you’re planning to sell your home, or if you don’t want to be stuck with your mortgage contract for a long time, a short-term is the way to go. If you sell your house before your term is up or break your contract in any way, you might face a penalty fee.
Anything above five years is considered long-term. Long-term mortgages are less popular for a few different reasons.
If you go long-term, you might be limited to only a fixed interest rate (which is fine if you had planned to go with a fixed interest rate). Still, your interest rate might also be higher, and you’re confined to the terms of your contract for a long time.
Open vs. closed term mortgages
Closed term mortgages
Closed term mortgages have a predetermined rate and limit the extra money you can put towards your mortgage. Once you have your set rate, you must stick to it or else you will have to pay a penalty fee for paying extra towards your mortgage. While not very flexible, closed mortgages are predictable, easy to plan for, and have a lower interest rate – and that’s probably why they’re the most popular mortgage type.
Open term mortgages
An open term mortgage means you can increase your mortgage repayments at any time, at any amount, either via your regular payments or via a lump sum. If you expect to come into some money and want to pay off your mortgage as soon as possible, an open mortgage is perfect for you. However, while more flexible, open term mortgages tend to have a higher interest rate.
Open term mortgages are ideal if you:
- Are selling your previous home and plan to pay off your mortgage with your earnings from the sale
- Will soon receive a large inheritance
- Expect to have a significant pay increase
Other types of mortgages:
A convertible mortgage means you can change the type of mortgage you have during your term. For example, if you want to start with an open mortgage and switch to a closed mortgage. Typically convertible mortgages have lower interest rates than open mortgages and can change to closed mortgages.
A portable mortgage lets you transfer your existing mortgage if you sell your home and buy another one. This one is great if you plan to sell your home in the near future instead of waiting till the end of your amortization period.
An assumable mortgage allows you to assume another homeowner’s mortgage and property or allows another homebuyer to take over your mortgage and your property.
Fixed interest rate
A fixed interest rate stays the same for your entire mortgage term. They are usually higher than variable rates, but you will know exactly how much your payments will be and when your mortgage will be paid off.
Fixed mortgages are ideal for homeowners who would rather have peace of mind knowing their interest rates won’t increase.
Variable interest rate
On the other hand, depending on market conditions, variable interest rates can increase or decrease during the term. Typically, the interest rates will be lower for variable rates, so you could save a lot of money by going with a variable interest rate. On the flip side, your interest rate can also increase at any time. Variable interest rates are a little bit riskier – but could end up saving you thousands.
Hybrid/combination interest rate
What if you can’t decide?
Some lenders will offer a hybrid interest rate, which means part of your mortgage will be fixed, while the other will be variable. This way, you get the best of both worlds. But it does have a few downsides – some lenders will charge extra fees, and they are also more challenging to transfer to a different lender or to a new home.
So which mortgage is right for you?
There is no right or wrong mortgage – it entirely depends on you, what you can afford, and how you would like to pay off your mortgage.
Not a fan of too much risk? Closed mortgages tend to be the most popular because their predictability means they’re less risky, making it easier for homeowners to plan and budget. While they have a higher interest rate, open mortgages allow homeowners to pay extra towards their mortgage without any penalties.
Likewise, fixed mortgages are popular, as the fixed interest rate provides a sense of security, with a term length of five years. However, some prefer to take a risk to receive a lower interest rate with a variable mortgage.
If you need a second opinion, we can help! At The MacDonald Property Group, our realtors want the best for our clients. We work with local trusted mortgage agents on a regular basis and we can recommend people that we have worked with. If you have any questions about mortgages, big or small, we’d be happy to walk you through your options to help you reach a decision that works for you and your family.
Buy and sell with confidence. Choose The MacDonald Property Group.
At The MacDonald Property Group, we have a dedicated, national award-winning full-service team all under one roof, ready to provide the expertise you can trust. Our team and associates are recognized as the top 1% in North America since 2010.
With over twenty-five years of experience in all aspects of real estate, we have bought and sold well over a thousand homes. We’ve been honoured to help thousands of clients in Barrhaven and across the Ottawa area close a deal with confidence and satisfaction. Give us a shout, and let us show you what we can do for you!