MORTGAGES: Be prepared for costlier mortgages: at least walk the talk

This week, the inevitable occurred: the Bank of Canada signalled it's about to sever the Canadian economy, and household, from the cheap money that has kept us all going since the Wall Street credit crisis, in the fall of 2008, vaporized international liquidity. As it starts to charge the country's banks more for the money they borrow from the central bank, probably by June, the cost of financing our home and garden aspirations will inevitably take off. It's news, and an eventuality, that make the Canadian mortgage a candidate for newsmaker of the year, 2010. It's also good reason to review our mortgage obligations. Here's a mortgage primer received this week from the national housing agency, and mortgage insurer, the Canada Mortgage and Housing Corporation.

What is a conventional mortgage and what is a high-ratio mortgage?

A conventional mortgage is a mortgage loan up to a maximum of 80 per cent of the lending value of the property. This means that the home-buyer has made a down payment of at least 20 per cent of the purchase price or market value of the home. If your down payment is less than 20 per cent of the purchase price, however, you will typically need a high-ratio mortgage. A high-ratio mortgage is a mortgage loan that is higher than 80 per cent of the lending value of the property, up to a maximum of 95 per cent. Normally, high-ratio mortgages have to be insured.

What are fixed and variable, or adjustable-interest, rates?

When you choose a mortgage, you have to decide whether you want the interest rate to be fixed, variable or adjustable. A fixed rate is locked in for the entire term of the mortgage. With a variable rate, the payments remain the same each month, but the interest rate fluctuates based on market conditions. For adjustable rate mortgages, both the interest rate and the mortgage payments vary based on market conditions. Talk to your mortgage professional to find out which option is right for you, and be sure to evaluate the impact of an increasing interest rate on your monthly payment.

What is an open mortgage? What is a closed mortgage?

With a closed mortgage, you pay the same amount each month for the entire term of the mortgage. Some flexibility to repay principal through lump-sum payments is allowed. Closed mortgages can be a good choice if you want a fixed payment schedule, and you don't plan on moving or refinancing before the end of the term. An open mortgage allows you to make a lump-sum payment at any time. This type of mortgage can be paid off before maturity without penalty. An open mortgage can be a good choice if you're planning to sell your home in the near future, or if you want the flexibility to make large lump-sum payments. An open mortgage generally carries a higher interest rate than a closed one.

What about term, amortization and payment schedule?

The term is the length of time (usually from six months to 10 years) that the interest rate and other conditions of your mortgage will be in effect. Amortization is the period of time (such as 25 or 30 years) over which your entire mortgage will be repaid. Lastly, the payment schedule sets out how frequently you will make payments on your mortgage -usually either monthly, biweekly or weekly. Accelerated payments are also an option. These are available for weekly and biweekly payment schedules and are generally equivalent to one extra monthly payment per year. With accelerated payments, the homeowner is able to pay off his/her mortgage faster while decreasing the overall interest cost.

(Source: Vancouver Sun)