Variable and Fixed Rate Mortgages
Fixed Rate Mortgage
Fixed interest rate for the entire term length, meaning your payments stay equal every month. For example, a 5 year fixed mortgage with 6.2% interest will stay at 6.2% interest for 5 years, without changes.
Variable Rate Mortgage
Has the variable interest rate which changes every month. Interest rate may go up or down, affecting monthly mortgage payments. The interest rate is affected by Canadian economy and monetary policies set by the Bank of Canada.
Whether the variable rate mortgage or fixed rate mortgage turns out better depends on what happens to interest rates in the future, which no one knows. Ask yourself a question, is this the risk worth taking? Can I afford to?
Payments on a variable mortgage vary every month by around $20 and up to $250. If rates go down significantly, payments may decrease by an average of $100. If rates increase significantly, payments may go up by $100. Though you can save more, changing payments can cause a headache to your budget.
Open vs Closed Mortgage - Which One is Better?
Pay off open mortgage any time, or make additional payments without penalties. Open mortgage terms range from 6 months to 1 year and can have variable and fixed interest rates. Expect higher interest rates then closed mortgage (check mortgage interest rates).
A Closed mortgage has lower interest rates but does not allow additional payments. If you make extra payments there will be penalties. Closed mortgage terms range from 6 months to 5 years and have variable and fixed interest rates.
Closed mortgages are more popular because of lower interest rates. If you want lowest interest rate - choose closed mortgage.
An Open mortgage gives you the freedom to make extra payments, anytime. You can pay off mortgage faster as a result and save money on interest payments. If you own a business or have extra income, an open mortgage can help to get rid of the debt faster.
An Open mortgage has 6 months - 1 year mortgage terms, meaning your interest rates will change every 6 months - 1 year. As interest rates change, so will your monthly payments.
Payment may go up or down because interest rates change with the economy so there's no way of predicting it.
Closed Mortgage Prepayment Penalties
If you pay off closed mortgage early or make an extra payment you will have to pay a prepayment penalty. This penalty is worth 3 months of interest payments. To find out how much of your monthly payment is interest payment, you need to know which month you're in. For example, if you had a mortgage for 2 years, then it's been 24 months; if you had a mortgage for 2 years and 5 months then it's been 29 months. Go ahead and calculate which month you're in right now since the start.
Once you know the month, use a mortgage calculator and fill in required fields with your current interest rate, initial mortgage amount and mortgage length. Then click on "Calculate" and scroll down to the month you're in right now. The calculator will show you how much of your monthly payment goes to interest.
Write down that number and multiply it by 3 to estimate closed mortgage prepayment penalty.
- Use a home mortgage calculator to estimate your monthly mortgage payments
- The longer your repayment period the more interest you pay. If you can afford higher monthly payments, get a mortgage with shorter repayment period
- You cannot fall behind on mortgage payments!
Calculate Your Monthly Mortgage Payments
Use mortgage calculator to estimate your monthly mortgage payments.
Part of your monthly mortgage payments go toward principal and part go toward interest. In the first months of your mortgage about two-thirds (2/3) of payments go toward interest, and only one third (1/3) toward principal. With each mortgage payment, you pay less interest and more principal.
The table below demonstrates mortgage payments in action. Notice how interest payments are very HIGH in the first 3 months but are VERY low in the last 3 months. Interest payments decline while principal payments rise.
First 3 Months of Mortgage Payments (amortization):
An Example of payments for a $200,000 home mortgage, 6.5 % interest rate for 25 years (300 months).
Notice how "Monthly Principal Payment" and "Monthly Interest Payment" columns changed from first 3 months to the last months of the mortgage.
Length of Your Mortgage and Mortgage Payments
- The longer your mortgage term, the more interest you pay.
- The shorter your mortgage term, the less interest you pay.
If you can afford larger monthly mortgage payments, get a mortgage with shorter repayment period, because you will save tens of thousands of dollars.
A 20-year mortgage with a difference of $140 in monthly mortgage payments can save $46,454.07 in interest payments in comparison to a 25-year mortgage at the same interest rate.
Extra Mortgage Payments
If you get an open mortgage, you can add additional payments anytime. Open mortgages have higher interest rates then closed mortgages.
With an open mortgage, you're free to make additional payments every month or pay the mortgage in full whenever convenient.
If you get a closed mortgage, you will not be able to make extra payments. Closed home mortgages have lower interest rates than open mortgages.
Falling Behind on Payments
Avoid falling behind on mortgage payments at all costs. Under home loan contract, you are not allowed to skip a single payment.
Missing One Mortgage Payment
Skipped payment makes you "delinquent". Once you are delinquent, your most recent payment is applied toward the latest missed obligation. For example: if you skipped July payment but paid in August, payment from August will go towards July. When you make another payment in September, it will go towards August. Payment in October will go towards September and so on until you pay off missed month.
Missed payment goes on your credit score. If you miss a payment, pay it back as soon as possible.
Expect lenders to constantly remind you of missed payment in letters and by calling your home or work. Lenders may also charge a penalty, but it depends on your contract.
Missing Two or More Mortgage Payments
Once you miss two or more payments, lender has a right to possess your property through "foreclosure" (define) or "power of sale" (define). Both are bad options.
Essentially lender will take your home and sell it.
When you miss 2 or more mortgage payments contact your mortgage lender and discuss your options. Lenders usually offer programs as long as you co-operate. Some of the options are:
- Reinstatement - pay entire missed amount, plus penalties, by a date you and lender agree on.
- Repayment plan - lender gives you time to repay missed money by adding portion of monthly payments to the past due balance.
- Forbearance - lender reduces or stops payments for an agreed period of time. By end of that period regular payments resume and you are required to pay back full amount owed. Forbearance does not help you if you can't afford a home you live in.
- Loan modification - changes in mortgage plan such as lower interest rate or longer mortgage term.
- Before you ask lender for "loan modification" or "forbearance", show your effort and initiative. Lower your bills, sell your car, get rid of other payments and show papers as proof. Lender is likely to agree if you do.
- Sell your home - if you can't pay for mortgage, sell your home before lender takes it from you.
- Bankruptcy - this is the last resort. Bankruptcy clears all debts, but leaves a horrible print on your credit score for 7 years.
How NOT to Fall back on Your Home Loan Payments
Before you get a mortgage, calculate if you can afford it together with other expenses, such as car, food and credit cards (if you have any). Use mortgage payment calculator to estimate monthly payments and review mortgage closing costs.
What to Avoid
There is a number of variable mortgages (not all) that offer very low interest rates as an introduction for the first 1 - 2 years. Introductory rates are usually between 2% - 4% and are very attractive in comparison to other rates. Once introductory rate period expires (1 - 2 years), a higher, regular mortgage rate kicks in. Be aware that introductory rates do not last long, so calculate your budget using real rates (to avoid nasty surprises).
Monitor daily interest rate updates to know real rates offered by lenders. You can even sign up by email for updates.
Does it Matter Who Makes Mortgage Payments?
Lenders only care about payments from "official" borrowers who signed the contract. If for some reason you can't make mortgage payments and your parents / friends are helping you out, make sure payments come in your name. If payments come in someone elses name, lender will contact you and start investigating.
Dealing with Mortgage Payment Difficulties
When unforeseen financial circumstances impact your ability to make regular mortgage payments, it?s important for you to take quick action. With early intervention, cooperation, and a well executed plan, you can work together with your mortgage professional to find a solution to your financial difficulties.
What Can I Do to Help?
If you find yourself facing financial difficulties, as a result of job loss, family income reduction, or for other reasons, it can be an overwhelming experience leaving you feeling uncomfortable and unsure of what to do. By following these three simple steps, you can make a big difference in resolving your financial difficulties.
1. Talk to your mortgage professional
- To increase the chance of successfully managing your financial situation through early intervention, call your mortgage professional at the first sign of financial
- Ask the mortgage professional about information on the options available for managing your financial situation; and
- Keep the mortgage professional informed as circumstances evolve.
2. Clarify the financial picture
In order to help your mortgage professional fully understand your financial situation, before meeting with them, prepare a detailed list of financial obligations including any credit cards, loans, household bills with the amounts owing and their due dates. Be sure to include information about your current income, savings accounts, investments, and any other assets.
3. Stay informed
The more information you have at your disposal on managing your finances, the easier it will be to make the right decisions.
Take Charge of Your Debts there is an online tool from the Government of Canada that is designed to help borrowers like you understand debt problems, and includes information on making a budget, budget counselling, collection agencies, credit, and credit repair. To view this tool, log on to www.ic.gc.ca (Industry Canada) and search for "Take Charge of Your Debts".
How Can Mortgage Professionals and CMHC Help?
Your mortgage professional wants to establish and maintain a positive relationship with you over the long term, and is fully trained and equipped with the tools to help you deal with the temporary financial setbacks that you may be facing.
For mortgages insured by Canada Mortgage and Housing Corporation (CMHC), CMHC provides mortgage professionals with tools and the flexibility to make timely decisions when working with you to find a solution to your unique financial situation. These tools include:
- Converting a variable interest rate mortgage to a fixed interest rate mortgage in order to protect you from a sudden interest rate increase, should one occur.
- Offering a temporary short-term payment deferral. Your mortgage professional may be prepared to offer greater payment flexibilities, particularly if previous lump sum prepayments have been made, or if you have previously chosen an accelerated payment schedule.
- Extending the original repayment period (amortization) in order to lower your monthly mortgage payments.
- Adding any missed payments (arrears) to the mortgage balance and spreading them over the remaining mortgage repayment period.
- Offering a special payment arrangement unique to your particular financial situation.
CMHC is also willing to consider other alternatives proposed by the mortgage professional to resolve or avoid mortgage payment default. In every case, the options available will depend upon your individual financial circumstances.
CMHC is Canada’s national housing agency. For over 60 years CMHC has shared a wealth of knowledge and housing expertise to help create an informed and reassured homeownership experience for Canadians.
What is CMHC Mortgage Loan Insurance?
Mortgage loan insurance is typically required by lenders when homebuyers make a down payment of less than 20% of the purchase price. Mortgage loan insurance helps protects lenders against mortgage default, and enables consumers to purchase homes with as little as 5% down payment ? with interest rates comparable to those with a 20% down payment. To obtain mortgage loan insurance, lenders pay an insurance premium. Typically, your lender will pass this cost on to you. The premium payable is based on a percentage of the home’s purchase price that is financed by a mortgage. The premium can be paid in a single lump sum or it can be added to your mortgage and included in your monthly payments.
Mortgage loan insurance is not to be confused with mortgage life insurance which guarantees that your remaining mortgage at the time of your death will not be a burden to your estate.
How Much Does CMHC Mortgage Loan Insurance Cost?
To obtain CMHC Mortgage Loan Insurance, lenders pay an insurance premium. Typically, your lender will pass these costs on to you. Your lender will give you the exact price when you apply for a mortgage.
The CMHC Mortgage Loan Insurance premium is calculated as a percentage of the loan and is based on the size of your down payment. The higher the percentage of the total house price/value that you borrow, the higher percentage you will pay in insurance premiums.
Remember: without mortgage insurance you may avoid the insurance premium but you?ll typically pay much higher interest rates and additional administrative fees. At the end of the day, for the vast majority of borrowers, the cost of CMHC Mortgage Loan Insurance is more than fully offset by the savings achieved.
A 10% premium refund and extended amortization period without surcharge may be available when CMHC Mortgage Loan Insurance is used to finance an Energy Efficient Homes.