Mortgage Broker Stayner

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If you are looking for a Mortgage Broker in Stayner to get great rates on your mortgage, you have come to the right place.

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Mortgage Broker in Stayner

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At The Mortgage Wellness Group we work for people like you in the Stayner area. As a your mortgage broker in Stayner we have the opportunity and flexibility to look around to help find you the very best mortgage option fitted to your precise requirements. In contrast to the big banks who have minimal mortgage products available to you, we have access to many lenders allowing us to help get you good and affordable mortgage rates in the Stayner area.

At The Mortgage Wellness Group we offer a mobile mortgage solution which means we come to you, when it suits you – no office appointments or time off work!

 

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What is a mortgage broker?
A mortgage broker is a licensed mortgage professional who can tell you what mortgage products are available from banks and lenders across Canada. They will also advise you through the mortgage process. Mortgage brokers are also able to pass volume discounts directly on to you because of the high quantities of mortgage products they acquire.
Mortgage brokers are an origination service, meaning that the mortgage broker originates your mortgage financing for you, but a bank or financial institution provides the money and services your mortgage after the closing.

What is the difference between a mortgage broker and a mortgage agent?
From a client’s perspective there is no difference between brokers and agents. Mortgage brokers have taken a separate course so that they can hire Mortgage agents to work for them. Mortgage agents have to work under the license of a principal mortgage broker. The brokerage is accountable for the agents, and how they conduct their business.

How are mortgage brokers paid?
Their commission is paid by the bank or lender providing the mortgage product based on how much money the consumer borrows. Mortgage brokers are typically not compensated on the interest the bank makes, so they do not receive a higher commission if the client chooses a higher rate. The commission generally works out to an average of 0.8% of the mortgage amount.

What is a fixed mortgage rate?
Fixed means your interest rate and regular payments will be the same for the duration of your mortgage term, whether rates rise or fall. It offers you stability and the least financial anxiety. But if interest rates drop significantly, you may be stuck paying a higher rate for the duration of your term, depending on the flexibility and features of your mortgage.

What is a variable mortgage rate?
Your mortgage payments will go up or down with the fluctuations in the prime rate, which is the market interest rate. The danger here is that a significant increase in the prime rate increases your interest payable as well. But if it decreases, you will pay less.

What is better,fixed or variable?
While over 60 percent of Canadians opted for a fixed mortgage rate in 2011, variable rates tend to be cheaper over time. Conversely, you may sleep better knowing you are not subject to interest rate fluctuations. Making the right choice depends largely on the current rates at the time you are taking out your mortgage. When interest rates are low and are not expected to drop further, locking into a fixed rate may be your best option. However, if experts are projecting that interest rates may fall, you are probably better off with a variable rate, especially if there is a significant difference between the fixed and variable rates.

What is a closed mortgage rate?
A closed mortgage can be fixed or variable. Closed mortgage rates are popular because they are lower than open mortgages rates but unlike an open mortgage, you are restricted on how much principal you can pay down annually and there will be a penalty to pay a closed mortgage out early. Terms range from six months to 10 years. Despite their low rates and relative stability, there are disadvantages so read the fine print before signing. Some banks have introduced fully closed mortgages where during the term, other than an arms-length sale. The sale can not be to a friend or relative.

What is an open mortgage rate?
An open mortgage can also be fixed or variable. The interest rate will be higher than for a closed mortgage but it is more flexible. Generally, you can pay an open mortgage off anytime or make additional payments without penalties. Terms range from six months to five years so you can not lock in for as long as a closed mortgage. If you want to get rid of your mortgage quickly, or think you may be selling or moving in the near future, this is a good option.

Why are mortgage rates so different?
Rates vary according to institutions. All of the banks have completely different products which is why their pricing is different. The price you pay depends on what features you want on that mortgage, mainly prepayment features. The ability to give additional lump sums of money as often as you can is important because it all goes to the principal. Discounted rate mortgages often have limited prepayment features which are suitable for most people.

What is CMHC?
Canada Mortgage and Housing Corporation (CMHC) is a Crown corporation that mainly provides mortgage loan insurance to residential home buyers. It was originally set up in 1946 to arrange post-war housing for veterans. Today it helps Canadians who can not easily afford buying a house through their mortgage default insurance program.

What is mortgage default insurance?
It is a type of mortgage insurance that is mandatory in Canada if your down payment for a residential property is less than 20 per cent. The major providers of this insurance is the Canada Mortgage and Housing Corporation, and Genworth.

The insurance costs you between 1.75 per cent to 2.95 per cent of your mortgage amount and you have to buy and pay for this insurance on top of your mortgage. It protects the banks and the money lenders if a homeowner defaults on their mortgage but does not protect the homeowner. However, lenders do offer lower mortgage rates because their risk is decreased.

The Mortgage Application Process

From filling in the paperwork, to signing on the dotted line.

There are various steps that will have to happen before you will be approved for a mortgage loan for a home purchase:

  • Choosing a potential lender
  • A pre-approval process if you want to know how much money you will have to shop with
  • Meeting and information download
  • A Debt Service Ratios analysis
  • A property analysis if you have identified the home of your dreams
  • Completing the Application
  • Negotiation and commitment
  • Closing process liaison
  • Mortgage administration

Choosing a potential lender

Using a mortgage broker/agent

  • If you are using a mortgage broker/agent and when they know all they need to know about you and your needs, they will start to consider which mortgage might be a good fit for you. They will think about whether you meet various lenders’ qualification requirements.
  • The mortgage broker/agent will provide you with options based on an assessment of the lender, the mortgage, its structure, its features and its risks in light of the information you have provided about your circumstances. The mortgage broker/agent must also explain his or her rationale for the options that have been identified.
  • Make sure the mortgage broker/agent provides you with information that will help you determine whether you can afford the mortgage, including an estimate of the total cost of borrowing for the term of the mortgage. The total cost of the mortgage depends on the terms and conditions for paying it back, such as the interest rate and the amount of time it takes to pay off the entire mortgage or “amortization period”. The total cost can be much more than the amount you are borrowing. You need to determine if the rate, amortization period and total cost of the mortgage are right for you.

Going direct to a lender or through other channels

  • Make sure you shop around to find a mortgage at a rate and for a term that is affordable for you, and with conditions with which you can live. If you are using a private lender, lending their own money on the security, make sure that they are either licensed if doing business as a mortgage lender, or otherwise are using a licensed Mortgage Brokerage.

Want to be Pre-Approved?

It is a good idea to get pre-approved for a mortgage before you start your search for a new home as it might help you keep a budget range in mind. You can ask a mortgage broker/agent to help you with this process, or go straight to a financial institution or other lender. You will receive written confirmation for a certain amount at a particular interest rate and the offer will be good for a specified amount of time. Keep in mind however that a pre-approved mortgage is not a guarantee of being approved for the mortgage loan, as that depends on a number of things including the property you want to purchase.

Meeting and Information

Your mortgage broker/agent or your lender will ask you for information to help them better understand you, your goals for the mortgage loan, and the type of mortgage you want or need including:

  • Your financial circumstances
  • Your assets
  • Your sources of income and/or funds, including employment
  • Your mortgage needs and objectives
  • Your knowledge of mortgages
  • Your preference in terms of amount, rate, term, amortization and conditions
  • Your risk tolerance
  • Other parties to the transaction
  • If you have identified a property you wish to purchase, information about the property that will become the security for the mortgage loan
  • If you know what your credit rating is
  • Your debt load or liabilities
  • The amount of down payment you have saved

They will also ask for documentation to confirm the information you provide.

Take the following information with you to your first meeting with a mortgage broker/agent or lender:

  • Information about your employment including confirmation of salary. A letter from your employer will be suitable for this
  • Information about any other sources of income you have and evidence
  • Details regarding where you bank
  • Proof of any assets including RRSPs or a savings account
  • Details of any loans or other debts such as student loans
  • Evidence of your down payment including information about the amount of down payment you have saved and where it is coming from
  • The full address of the property
  • A copy of the real estate listing, if applicable
  • Your mortgage pre-approval certificate, if one was issued and you have now identified a property
  • Contact information for your lawyer or notary
  • A copy of the agreement of purchase and sale
  • Estimates of your monthly housing costs (e.g., property taxes, utilities, etc.)
  • Proof that you have the funds to cover any closing costs

Lenders or mortgage brokers/agents will rely on the information you provide. This information helps them find the mortgage option(s) and/or lender(s) that are right for you. It is critical that you are completely honest when providing them this information. Errors in your application can easily lead to a mortgage that is not right for you or fit for your circumstances, plus misstating facts or providing false information in your mortgage application can have serious consequences. You could face up to 10 years of jail time. Lenders and mortgage brokers/agents are expected to ask questions and seek additional information in the event of inconsistencies with the information you provide.

Debt Service Ratios

Your mortgage broker/agent or lender will need to make sure that you can carry a mortgage. They will do this by performing a Debt Service Ratio Analysis, basically comparing your debt to your income to see whether you can afford the mortgage loan you want. Most lenders will require that your monthly housing costs (Gross Debt Service), including mortgage payments, property taxes, condo fees and heating expenses, are no more than 32 per cent of your gross monthly income. They also want to know that your total monthly debt load, including for example car loans or leases and credit card payments (Total Debt Service), is not more than 44 per cent of your gross monthly income. As well as qualifying for the mortgage loan at the rate offered by the lender, if you are putting less than 20 per cent of the purchase price down and are therefore applying for a high-ratio mortgage, you will also need to qualify at the Bank of Canada’s five-year fixed posted mortgage rate, which is usually higher. In that case your lender will also require that housing costs are no more than 39 per cent of your monthly income. This extra “stress test” is the Government of Canada’s response to the sharp increase in house prices in certain Canadian cities, and concerns that currently low mortgage rates will eventually rise. All home buyers applying for a high-ratio loan, and therefore requiring mortgage insurance, or those required by their lender to get mortgage insurance for other reasons, are subject to the “stress test”. It assures mortgage lenders that the home buyer would still be able to afford the mortgage if prices or rates increase.

Property to be Mortgaged

If you have already identified a property, your lender or mortgage broker/agent might need to analyze the property to ensure it is worth enough to provide security for the mortgage loan. They might want to view the property online with you, view the property listing on MLS or a self-listing website and/or obtain a property appraisal or home inspection to determine fair market value. You may need to negotiate access to the property with the sellers, and you will be responsible for paying appraisal and home inspection fees, unless a lender pays as an incentive for you to sign up.

Completing the Application

If you are using a mortgage broker/agent to find you a loan, once they have your approval to approach a particular lender, they will complete your application including information about the property if you have chosen one, and information about you from your meeting. You should be asked to sign a written acknowledgement that they have disclosed the risks associated with the mortgage they have presented. If you are dealing direct with a lender, you will complete the application with them. The mortgage application will include basic information such as your name, address and telephone number, social insurance number, employer, income, number of dependents, and the name and address of your bank or other financial institution. The application will also detail: your assets, such as mutual funds and RRSPs and liabilities, including credit cards, credit lines, loans or leases; the purpose of the loan; mortgage loan amount required; the type of mortgage loan you want; the mortgage term, amortization and interest rate you seek; plus a description of the property you want to purchase such as address, size, type and construction. Make sure you read the application carefully before signing it, and never sign an incomplete form. You will also need to sign a Credit Authorization Form giving the mortgage broker/agent or lender authorization to perform a credit check. A mortgage broker/agent cannot and should not request a credit report without prior consent from you.

Credit Bureau Check

A credit report from a credit bureau will tell a potential lender how well you have paid your debts and bills in the past, your outstanding debt levels, and employment, income and residence history. The credit bureau report will include a credit score – a single indicator of how likely you are to repay your loan at the agreed upon terms. It summarizes all the information available about you and provides the findings as a single number. The report will also include information about any bankruptcies, collections, judgments, garnishments or liens against you and whether you have gone through a foreclosure or Power of Sale proceeding in the last five to seven years. Neither the lender nor your mortgage broker/agent will be able to give you a copy of this report, but can discuss issues with you and must note these issues in the mortgage application. While the mortgage broker/agent or lender is required to do a credit check, you can always also get a copy of your own credit history and make sure it is complete and accurate. Doing this early in your home buying journey and before you meet with a mortgage broker/agent or lender gives you the chance to re-establish a good credit history if the report shows you currently have poor credit.

There are two main credit-reporting agencies: Equifax Canada Inc. and TransUnion of Canada. You will pay a small fee for this service. Once completed you will sign the mortgage application form, confirming that the facts on the application are correct.

Negotiation and Commitment

Once a potential lender lets you or your mortgage broker/agent know that they are willing to advance the loan, you or your mortgage broker/agent will then start to negotiate the deal. You will discuss a final mortgage rate and term for the loan and you or your mortgage broker/agent might need to supply more documentation to support your application. Once you receive the official Mortgage Approval or Letter of Commitment, make sure to review all of the terms and conditions before you sign and return the agreement.

Closing Process Liaison

Once the lender has received your signed agreement the closing process will start. Your mortgage broker/agent may continue to liaise between you and the lender and perhaps even the lawyers involved for you and the seller.

Ongoing Mortgage Administration

If you have used a mortgage broker/agent to help you find a mortgage loan, and their brokerage is also licensed as an administrator, after the property sale closes and the funds are provided by the lender, your mortgage file may be sent to the mortgage brokerage’s administration department. They will track payments, calculate outstanding loan balances and might collect municipal property taxes. They may alert the mortgage broker/agent when your mortgage term is near completion so that the mortgage broker/agent can assist you with renewal or the selection of a new lender for the next term.

Source:

Financial Services Commission of Ontario (FSCO)

5160 Yonge Street, P.O. Box 85,
Toronto, Ontario M2N 6L9
Telephone: (416) 250-7250 | Toll free: 1 (800) 668-0128
Fax: (416) 590-7070 | TTY: 1 (800) 387-0584
Website: www.fsco.gov.on.ca

Minimum down payment

A down payment is the amount of money that you put towards the purchase of a home. The down payment is deducted from the purchase price of your home. Your mortgage loan will cover the rest of the price of the home. The minimum amount you will need for your down payment depends on the purchase price of the home you would like to buy.

The minimum amount needed for your down payment is based on the purchase price
Purchase price of your home Minimum amount of down payment
$500,000 or less
  • 5% of the purchase price
$500,000 to $1 million
  • 5% of the first $500,000 of the purchase price
  • 10% for the portion of the purchase price above $500,000
$1 million or more
  • 20% of the purchase price

If you are self-employed or have a poor credit history, you may be required to provide a larger down payment. Normally, the minimum down payment must come from your own funds. It’s better to save for a down payment and minimize your debts.

Example: How to calculate your minimum down payment

If the purchase price of your home is $500,000 or less

Suppose the purchase price of your home is $350,000. You’ll need a minimum down payment of 5% of the purchase price. The purchase price multiplied by 5%, for a total of $17,500.

If the purchase price of your home is more than $500,000

Suppose the purchase price of your home is $600,000. Your minimum down payment will be 5% on the first $500,000, for a total of $25,000. On the remaining $100,000, your minimum down payment will be 10%, for a total of $10,000. Add both totals together and your minimum down payment would be $35,000.

Home Buyers’ Plan

To help you come up with a down payment, you may be eligible for the Home Buyers’ Plan. The Home Buyers’ Plan allows you to withdraw up to $25,000, tax-free, from your Registered Retirement Savings Plan (RRSP) to buy or build a qualifying home. You have up to 15 years to repay the amounts you withdrew.

Before you sign up for the Home Buyers’ Plan, consider:

  • if you’ll be able to make the repayments
  • will withdrawing funds impact your retirement savings

Keep in mind:

  • Not making the repayments could end up costing you a lot of money in income tax
  • Even though you will eventually repay the funds, you may still lose out on any growth while the funds are withdrawn

Mortgage loan insurance

Mortgage loan insurance protects the mortgage lender in case you are not able to make your mortgage payments. It doesn’t protect you. Mortgage loan insurance is also sometimes called mortgage default insurance. If your down payment is less than 20% of the price of your home, you will need to purchase mortgage loan insurance. If you are self-employed or have a poor credit history, you may also be required to get mortgage loan insurance, even if you have a 20% down payment.

Mortgage loan insurance is not available, if:

  • the purchase price of the home is over $1 million
  • the loan does not meet the mortgage insurance company’s standards

Your lender will coordinate getting mortgage loan insurance on your behalf if you need it.

Cost of mortgage loan insurance

A premium is a fee you pay to get mortgage loan insurance. Mortgage loan insurance premiums vary from 0.6% to 4.50%, depending on the amount of your mortgage. Premiums will also vary depending on the amount of your down payment. The bigger your down payment, the less you’ll pay in mortgage loan insurance premiums.

Find premiums based on the amount of your mortgage loan:

To pay your premium, you can either add them to your mortgage loan or pay them with a lump sum up front. If you add your premium to your mortgage loan, you will be paying interest on your premium at the same interest rate you’re paying for your mortgage.

Ontario, Manitoba and Quebec apply provincial sales tax to mortgage loan insurance premiums. Provincial taxes on premiums can’t be added to your mortgage loan. You must pay these taxes when your lender funds your mortgage.

Example: How mortgage loan insurance premiums are calculated

Suppose you want to buy a home for $300,000. You have a down payment of $42,000, which is 14% of the purchase price. Because your down payment is less than 20%, you will need to get mortgage loan insurance. Based on the size of your down payment, your premium will be 3.10% of your loan amount.

To calculate your mortgage loan insurance premium:

  1. Take the price of your home and subtract your down payment ($300,000 – $42,000 = $258,000)
  2. Take the amount of your mortgage and multiply by the insurance premium ($258,000 x 3.10% = $7,998)
  3. Your mortgage loan insurance premium will be $7,998

If you add the premium to your loan ($258,000 + $7,998 = $265,998), your mortgage loan would now be $265,998. You will now have to pay more interest charges because the amount of your mortgage has increased. Let’s assume you plan to pay off this mortgage over 25 years with a 4% interest rate. Compared to someone with a 20% down payment on the same home, you will pay an extra $15,028 in interest on your mortgage loan insurance premium. In total, you will pay $23,026 in mortgage loan insurance.

How the size of a down payment affects the total cost of a mortgage

Save as much as you can for your down payment. The bigger the down payment, the smaller the mortgage, which can save you thousands of dollars in interest charges.

Example: How the size of a down payment affects the cost of a mortgage

You would like to purchase a home that costs $300,000. Assume the following:

  • interest rate is 4%
  • amortization period is 25 years
  • payment frequency is monthly
  • mortgage loan insurance premiums have been added to the mortgage loan
Effect of the size of a down payment on the total cost of a mortgage
Down payment Down payment amount Mortgage loan
(including mortgage loan insurance)
Mortgage loan insurance premium Total mortgage cost after 25 years
(includes principal & interest)
Total cost of your home
(includes mortgage loan, interest and down payment)
5% $15,000 $296,400 $11,400 $467,737 $482,737
10% $30,000 $278,370 $8,370 $439,285 $469,285
20% $60,000 $240,000 Not required $378,735 $438,735

Choosing the right mortgage product

A mortgage is a loan to help you buy a home or other property. Mortgages have different features to meet different needs. Make sure you understand the options and features lenders offer you when you shop for a mortgage. This will help you choose a mortgage that best suits your needs.

Open and closed mortgages

The main difference between open and closed mortgages is the amount of flexibility you have in making extra payments or paying off your mortgage completely. Putting extra money toward your mortgage is called a prepayment. Prepayments allow you to pay down your mortgage faster.

Open mortgages

The interest rate is usually higher than on a closed mortgage with a comparable term length. This is because it allows more flexibility if you think you may extra money toward your mortgage on top of your regular payments.

Open term mortgages allow you to do the following at any time during your term without paying a penalty:

  • put extra money toward your mortgage on top of your regular payments at any time
  • pay off your mortgage completely before the end of the term
  • renegotiate your mortgage before the end of your term
  • break your contract to change lenders before the end of your term

An open mortgage may be a good choice if you:

  • plan to pay off your mortgage soon
  • plan to move in the near future
  • think you may have extra money to put toward your mortgage from time to time, such as if you get a lump-sum bonus

Closed mortgages

The interest rate on a closed mortgage is usually lower than on an open mortgage with a comparable term length. Closed term mortgages usually limit the amount of extra money you can put toward your mortgage each year on top of your regular payment without paying a penalty. Your mortgage contract includes a limit to the amount of extra money you may put toward your mortgage. Your lender calls this a prepayment privilege. Not all closed mortgages allow prepayment privileges. They vary from lender to lender.

You may have to pay a penalty if you break your mortgage contract, or change lenders.

You will generally be required to pay a prepayment penalty if:

  • you make a prepayment that is more than what your lender allows
  • you decide to break your mortgage contract

A closed mortgage may be a good choice for you if:

  • you plan to keep your home for the rest of your loan’s term
  • the prepayment privileges provide enough flexibility for the prepayments you expect to make

When shopping around for a mortgage, ask potential lenders about these options. Make sure to understand all the terms and conditions of your mortgage contract.

Choose an amortization period

The amortization period is the length of time it takes to pay off a mortgage in full. The longer the amortization period, the lower your payments will be. Keep in mind that the longer you take to pay off your mortgage, the more you’ll pay in interest.

If your down payment is less than 20% of the purchase price of your home, the longest amortization you are allowed is 25 years.

How amortization affects the amount of principle paid back and interest paid after five years
Mortgage amount Amortization Monthly payment Total interest paid
(Assume a constant interest rate of 4%)
Amount of principal paid back after five years
(Assume a constant interest rate of 4%)
Percentage of your mortgage paid back after five years
(Assume a constant interest rate of 4%)
$300,000 25 years $1,578 $173,418 $38,838 8%
$300,000 20 years $1,813 $135,057 $54,384 12%
$300,000 15 years $2,214 $98,541 $80,973 20%
$300,000 10 years $3,033 $63,919 $135,196 37%

Choose a term

The mortgage term is the length of time your mortgage contract will be in effect. This includes everything your mortgage contract outlines, including the interest rate. Terms can range from just a few months to five years or longer. At the end of each term, you will need to renew your mortgage. You’ll most likely require multiple terms to repay your mortgage in full. If you are able to pay off your mortgage in full at the end of your term, you don’t need to renew your mortgage. If you want to renegotiate your mortgage contract or pay off your mortgage before the end of the term, you may have to pay a prepayment penalty. The amount you will pay will depend on the type of mortgage you have and the terms and conditions of your mortgage contract.

When choosing the length of your term, you may want to consider:

  • if you plan on moving
  • if you want to have the same payment for a longer period of time

Short-term mortgage

If you choose a short-term mortgage, you won’t have to wait as long if you want to renegotiate your mortgage for a lower interest rate or change lenders without paying any fees. This may be a good choice if you expect interest rates to go down or if you may need to change your mortgage within the next couple of years. For example, if you think you will be moving to a new home. However, if interest rates go up, you may need to renegotiate your mortgage at a higher interest rate.

Long-term mortgage

If you choose a longer-term mortgage, you can lock in an interest rate for a longer period of time. This may help you with budgeting, since you’ll know for certain what your housing costs will be for a longer period of time. However, you may not be able to make any changes to your mortgage contract for several years without having to pay a prepayment penalty. For terms longer than five years, you may pay a lower prepayment penalty after five years have passed. After five years, you’ll only be charged three months’ interest on the remaining mortgage balance if you want to make changes to your mortgage contract.

Convertible term mortgage

A convertible mortgage means that some short-term mortgages can be extended to a longer term. Once the mortgage is converted or extended, the interest rate will change to the rate the lender is offering for the longer term.

Decide on fixed or variable interest rates

Interest is the amount of money you’ll pay to a lender for borrowing money. When you apply for a mortgage, your lender may offer different options to calculate the interest you will pay on your loan.

Fixed interest rate mortgage

Fixed interest rates will stay the same for the entire term. Fixed interest rates are usually higher than variable interest rates.

A fixed interest rate mortgage may be better for you if you want to:

  • keep your payments the same over the term of your mortgage
  • know in advance how much of your mortgage principal will be paid off by the end of your term
  • keep your interest rate the same because you think there is a good chance that market interest rates will go up over the term of your mortgage

Variable interest rate mortgage

A variable interest rate can increase and decrease during the term. If you choose a variable interest rate, you may be offered a lower interest rate than the one you would get if you selected a fixed interest rate. Keep in mind that the rise and fall of interest rates are difficult to predict. Consider how much of an increase in mortgage payments you would be able to afford if interest rates rise. Note that between 2005 and 2015, interest rates varied from 0.5% to 4.75%.

Fixed payments with a variable interest rate

If the interest rate goes up, more of your payment will apply to interest, and less to the principal. If the interest rate goes down, more of your payment will apply to the principal. You will pay off your mortgage faster. If the market interest rates increase to a certain percentage or trigger point, your lender may increase your payments. This payment increase will make sure that you pay off your mortgage in the timeframe, that is, amortization period, you originally agreed upon with your lender. Your mortgage contract lists the trigger point.

Adjustable payments with a variable interest rate

With adjustable payments, the amount of your payment will change if the interest rate changes. A set amount of each payment will apply to the principal. The interest portion will change as the interest rates change. You’ll know in advance how much of the principal will be paid at the end of the term. If the interest rate rises, your payments will increase. Make sure that you’ll be able to adjust your budget in case your payments increase. If the interest rate goes down, your payments will decrease.

What you can do to protect yourself if interest rates rise

Ask your lender if it offers:

  • an interest rate cap: a maximum interest rate your lender can charge on a mortgage. You will never have to pay more in interest than the maximum cap, even if the interest rates rise
  • a convertibility feature: where, at any time during your term, you can convert or change your mortgage to a fixed interest rate

Note that if you choose a convertibility feature and change your mortgage to a fixed interest rate:

  • you will usually have to pay a fee
  • certain conditions may apply
  • your new fixed interest rate may be higher than the variable interest rate you have been paying

Example: Choosing between variable and fixed interest rates

Suppose you are buying a home and need a mortgage for $200,000.

You are looking for a mortgage with the following:

  • a 25-year amortization period
  • a five-year term

Your lender offers you the following interest rates:

  • 3.5% for a variable interest rate, with adjustable payments, or
  • 4.0% for a fixed interest rate

To decide which interest rate you will choose, consider the different scenarios in Table 2.

Compare variable and fixed interest rates
Scenario 1:

  • fixed interest rate mortgage
  • interest rate not affected by changes in market interest rates
Scenario 2:

  • variable interest rate mortgage
  • increases by 2% during five-year term
Scenario 3:

  • variable interest rate mortgage
  • interest rate increases by 4% during five-year term
Scenario 4:

  • variable interest rate mortgage
  • interest rate stays the same during five-year term
Interest rate Monthly payment Interest rate Monthly payment Interest rate Monthly payment Interest rate Monthly payment
Year 1: 4.0% $1,052 3.5% $999 3.5% $999 3.5% $999
Year 2: 4.0% $1,052 4.0% $1,050 4.5% $1,103 3.5% $999
Year 3: 4.0% $1,052 4.5% $1,101 5.5% $1,209 3.5% $999
Year 4: 4.0% $1,052 5.0% $1,152 6.5% $1,316 3.5% $999
Year 5: 4.0% $1,052 5.5% $1,202 7.5% $1,423 3.5% $999
Total payment over five-year term $63,122 $66,044 $72,607 $59,912
Interest paid over five-year term (part of total payment) $37,230 $41,620 $50,830 $32,472
Amount left on your mortgage after five years $174,108 $175,576 $178,223 $172,560

Over the life of the five-year term:

  • Scenario 1: your payments would remain the same at $1,052
  • Scenario 2: your payments would increase by $203 (from $999 to $1,202)
  • Scenario 3: your payments would increase by $424 (from $999 to $1,423)
  • Scenario 4: your payments would remain the same at $999

Consider if you are comfortable with the possibility of interest rates increasing. Decide if your budget could handle higher payments. If not, a fixed rate mortgage may be better for you.

A variable interest rate mortgage may be better for you if you are comfortable with:

  • your interest rate changing and you think there is a good chance interest rates may drop or stay the same
  • your mortgage payments potentially changing
  • the need to follow interest rates closely if your mortgage has a convertibility option

Hybrid or combination mortgages

You could also choose a hybrid or combination mortgage. In these mortgages, part of your mortgage has a fixed interest rate and the other part of your mortgage has a variable interest rate. The fixed portion gives you partial protection in case interest rates go up. The variable portion provides partial benefits if rates fall. Each portion may have different terms. This means hybrid mortgages may be harder to transfer to another lender.

Decide how often you will make payments

When you make a mortgage payment, the money is split between interest and principal. Money is first put toward the interest, and then toward the principal. The principal is the amount you borrowed from the lender. When you first get a mortgage, most of your payments will go toward interest. The amount that you owe will only go down a little. As your mortgage balance decreases, more of your payment will go to the principal.

Payment frequency

Payment frequency refers to how often you make your mortgage payments. Your payment frequency is set when you and your lender first arrange your mortgage, but you may be able to change it.
Monthly
  • One payment per month for a total of 12 per year

Semi-monthly (twice a month)

  • Two payments per month for a total of 24 payments per year
  • Take your monthly payment and divide it by two (monthly payment divided by 2)
  • The total amount you pay over the year is the same as with the monthly payment option

Biweekly (every two weeks)

  • One payment every two weeks, for a total of 26 payments per year
  • Take your monthly payment, multiply it by 12 and then divide by 26 (monthly payment x 12 divided by 26)
  • The total amount you pay over the year is the same as with the monthly payment option

Weekly

  • One payment per week, for a total of 52 payments per year
  • Take your monthly payment, multiply it by 12 and then divide by 52 (monthly payment x 12 divided by 52)
  • The total amount you pay over the year is the same as with the monthly payment option

Accelerated payment options

Accelerated weekly and biweekly payments will help you pay off your mortgage faster. Accelerated options allow you to make the equivalent of one extra monthly payment each year. This can save you thousands, or even ten thousands of dollars in interest charges over the life of your mortgage.

Accelerated biweekly

  • A payment of half the monthly payment every two weeks.
  • Take your monthly payment and divide it by two
  • With this payment frequency, you’ll make the equivalent of one extra monthly payment per year

Accelerated weekly

  • A payment of a quarter of the monthly payment every week.
  • Take your monthly payment and divide it by 4
  • With this payment frequency, you will make the equivalent of one extra monthly payment per year

Example: Determining how often you will make payments

Suppose you have a $260,000 mortgage that you will pay off over 25 years. You have a 4% interest rate for the entire amortization period.

Impact of changing the payment frequency
Payment frequency Number of payments
per year
Payment amount Total payments
per year
Interest saved on mortgage
Monthly 12 $1,400 $16,800 $0
Semi-monthly 24 $700
($1,4000 / 2)
$16,800 $197
Biweekly 26 $646
($1,400 x 12 / 26)
$16,800 $212
Accelerated Biweekly 26 $700
($1,40 / 2)
$18,200 $21,273
Weekly 52 $323
($1,400 x 12 / 52)
$16,800 $305
Accelerated weekly 52 $350
($1,400 / 4)
$18,200 $21,509

If you choose an accelerated payment frequency, you will make the equivalent of one extra payment each year. You’ll also pay off your mortgage more than four years sooner. You will save over $21,000 in interest over the amortization period.

Mortgage security registration: standard vs. collateral charges

A charge allows your lender to sell your property if you don’t repay the mortgage as agreed. The lender will sell your property to recover the money you owe. Once you pay off your property, your mortgage charge is removed or discharged. There may be costs associated with discharging your mortgage. Ask your lender about the steps to discharge your property. The type of charge used by a lender varies. Different types of charges may be associated with different types of mortgage products. Before you make a final decision on your mortgage, ask the lender how your charge will be registered.

Standard charge

A standard charge only secures the mortgage loan that is detailed in the document. It doesn’t secure any other loans you may have with your lender, such as a line of credit. The charge is registered for the actual amount of your mortgage. If you want to borrow more money in the future, you may be able to use your home to secure the new loan. You will need to apply and re-qualify for additional money and register a new charge. There may be costs, such as legal, administrative, discharge and registration costs. If you want to switch your mortgage loan to a different lender at the end of your term, you may be able to do so by assigning your mortgage to a new lender. Talk to your lender for full details.

Collateral charge

A collateral charge can be used to secure multiple loans with your lender, including a mortgage and a line of credit. The charge can be registered for an amount that is higher than your actual mortgage loan. This allows you to potentially borrow additional funds on top of your original mortgage loan in the future without having to pay fees to discharge your mortgage and register a new one. You only have to make payments, including interest, on the money you actually borrow. A new charge will only be required if you want to borrow more than the amount that is registered on the original charge. You will still need to apply for additional money and re-qualify.

Changing lenders when you have a collateral charge

A collateral charge may make it more difficult to switch lenders at the end of your term. Some lenders may not accept the transfer of your collateral charge mortgage. To change lenders you’ll need to discharge your mortgage. You’ll need to repay, or transfer to the new lender, all loans you have secured with a collateral charge. This may include car loans or lines of credit. You may also have to pay fees such as legal, administrative, discharge and registration costs. Check with your lender for details and if any discounts are available to you.

Portable and assumable mortgages

If you plan on selling your home or moving, you may consider portable and assumable mortgages.

Portable mortgage

If you’re selling your home to buy another home, a portable mortgage allows you to transfer your existing mortgage to a new property and remain with the same lender. This includes the transfer of your mortgage balance, interest rates and terms and conditions.

You may want to consider porting your mortgage, if

  • you have favourable terms on your existing mortgage
  • you want to avoid prepayment penalties for breaking your mortgage contract early

Check with your lender to see if your mortgage is eligible for porting. Ask about any restrictions that might apply

Porting your mortgage to a home that costs less

If your new home will cost less than the amount you owe on your mortgage, you may be required to pay a prepayment penalty.

Porting your mortgage to a home that costs more

If you need to borrow more money for your new home ask your lender for details.

If your lender agrees to lend you more money:

  • your final interest rate may be blended into a combination of your old interest rate and the new interest rate
  • your lender may charge you the current interest rate on the additional money you borrow
  • you may have to pay for an additional amount of mortgage loan insurance

Some lenders limit the time between the closing of the sale of your current home and the closing of the sale of your new one. For example, your lender may need you to take possession of your new home no more than 120 days before or after you sell your current home.

Assumable mortgage

An assumable mortgage allows you to take over or assume someone else’s mortgage and their property. It also allows someone else to take over your mortgage and your property. The terms of the original mortgage must stay the same.

You may want to consider an assumable mortgage, if:

  • you are a buyer and interest rates have gone up since the mortgage was first taken out
  • you are a seller and want to move to a less expensive home but want to avoid prepayment charges because you have several years left on your existing term

Most fixed-rate mortgages can be assumed. Variable-rate mortgages and home equity lines of credit cannot.

Approval of assumable mortgages

In most cases, the lender and the buyer who wants to assume the mortgage must approve the transfer. If approved, the buyer will take over the remaining mortgage payments to the lender and is responsible for the terms and conditions set out in the mortgage contract.

Liability for assumable mortgages

In some provinces, after a mortgage has been assumed, the seller may remain personally liable for the mortgage. This means that if the buyer does not make their mortgage payments, the lender may ask the seller to make the payments. Some lenders may release the seller from being held responsible if the buyer is approved for the mortgage. Check with your lender to see if your mortgage is assumable. Lenders may charge you a fee to assume a mortgage. Your mortgage contract should indicate if you need to pay a fee to complete the transfer.

Cash back mortgages

Cash back is an optional feature on some mortgages. It gives you part of your mortgage amount in cash right away. It can help you pay for things you’ll need when you get a new home, such as legal fees or furniture. Usually, if you use the cash back feature, your interest rate will be higher. The amount of interest you’ll pay may end up costing you more money than you’ll get as cash back. Your lender can put limits on the cash back feature. For example, you may not be able to use cash back funds as part of your down payment. You may be asked to repay some or all of the cash back amount if you decide to break, renegotiate, transfer, or renew your mortgage before the end of the term.

Title insurance

Your lender may require you to get title insurance as part of your mortgage contract. The title on a home is a legal term used to define who owns the land. When you buy a home, the title on the house is transferred to you.

Title insurance is an insurance policy that protects you as a property owner and your lenders against losses related to the property’s title or ownership such as:

  • survey issues
  • title fraud
  • problems with the title on your property
  • challenges to the ownership of your home

Survey issues could include an error revealed by a new survey where part of your home, such as a deck or garage, is actually on a neighbour’s property. Title fraud occurs when criminals steal your identity in order to fraudulently get a larger mortgage on your property or transfer your title to themselves and then sell your house.

Types of title insurance

There are two types of title insurance:

  • lender title insurance: protects the lender until the mortgage has been paid off
  • homeowner title insurance: protects you as the homeowner from losses as long as you own the home, even if there is no mortgage

How much title insurance costs

You pay a one-time cost, based on the value of your home. The one time cost is called a premium. Premiums generally cost between $150 and $350, but could cost more. If you’re the buyer, you’ll generally pay the homeowner title insurance premium when you purchase the property. If you don’t buy title insurance right away, you can buy it at a later date.

Where to get title insurance

Title insurance is available from:

  • your lawyer (or notary in Quebec and British Columbia)
  • title insurance companies
  • insurance agents
  • mortgage brokers

Prepayment privileges

A prepayment privilege is the amount you can put toward a closed mortgage on top of your regular mortgage payments, without having to pay a prepayment penalty.

Your prepayment privileges allow you to:

  • increase your regular payment by a certain percentage
  • make a lump-sum payment up to a certain amount or percentage of the original mortgage amount

Privileges vary from lender to lender. Check the terms and conditions of your mortgage contract to find out:

  • if your lender allows you to make prepayments
  • when your lender allows you to make prepayments
  • if there is a minimum or a maximum amount that you may prepay
  • what fees or penalties may apply
  • other related terms or conditions

If you don’t make a prepayment on your mortgage one year, you usually won’t be able to add the amount you didn’t use to your prepayment the following year.

Prepayment penalties

A prepayment penalty is a fee that your lender may charge if:

  • you make more than the allowed additional payments toward your mortgage
  • you break your mortgage contract

Your lenders may call the prepayment penalty a prepayment charge or breakage cost.

Prepayment penalties can cost thousands of dollars. It’s important to know when they apply and how your lender calculates them.

You can base your estimate of your prepayment penalty on factors such as:

  • how much you want to prepay (or pay off early)
  • how many months are left until the end of your term
  • interest rates
  • the method your lender uses to calculate the charge

When prepayment penalties apply

If you have a closed mortgage, you’ll need to pay a prepayment penalty if you:
  • pay more than the amount your prepayment privileges allow
  • borrow more money using home equity
  • break your mortgage contract
  • transfer your mortgage to another lender before the end of your term

If you have an open mortgage, you can make a prepayment or lump-sum payment without paying a penalty.

How lenders calculate prepayment penalties

The way your prepayment penalty is calculated varies from lender to lender.

The prepayment penalty will usually be the higher of:

  • an amount equal to 3 months’ interest on what you still owe
  • the interest rate differential (IRD)

The interest rate differential is the difference between the interest rate on your current mortgage term and today’s interest rate for a term that is the same length as the remaining time left on your current term.

Review your mortgage contract to find out exactly how your lender will calculate your prepayment penalty. Check with your lender for the actual amount. Ask your lender to explain anything you don’t understand. You may also have to pay an administration fee to make a prepayment.
Rights and Responsibilities

Mortgage prepayment means paying more than the regular mortgage payments you have agreed to pay in your mortgage contract. If you have a closed mortgage, your mortgage agreement may include prepayment privileges, which allow you to pay more than your regular payments without triggering any prepayment charges.

On the other hand, breaking your mortgage contract, or prepaying more than your privileges allow, will generally result in prepayment charges that could cost you thousands of dollars.

If your lender is a federally regulated financial institution (FRFI), such as a bank, it must outline prepayment privileges and charges, along with other key details, in an information box at the beginning of your mortgage agreement.

By law, it must tell you how the prepayment charge will be calculated. It must also provide you with a description of the components used in the calculation of the charge. This information must be presented in a manner and written in language that is clear, simple and not misleading.

If the calculation is complex, your lender may provide a simplified example, illustration or method to help you estimate the prepayment charge.

Voluntary code of conduct

Some financial institutions have also agreed to provide additional information on prepayments under a voluntary Code of Conduct. As of January 2013, banks that are members of the Canadian Bankers Association have agreed to comply with this Code.

Lenders following the Code have agreed to provide:

    • the differences between:
      • fixed-rate and variable-rate mortgages
      • open and closed mortgages
      • short-term and long-term mortgages
    • ways you can pay off a mortgage faster without having to pay a prepayment charge
    • ways to avoid prepayment charges
    • how prepayment charges are calculated, along with examples
    • actions that may result in you having to pay a prepayment charge such as:
      • prepaying amounts that are higher than your mortgage agreement allows
      • refinancing your mortgage
      • transferring your mortgage to another lender

Information to help you understand the factors that can affect a prepayment charge so that you can make informed decisions. Lenders may make this information available to you online or upon request at their places of business in Canada, including where consumers are pre-approved for a mortgage.

  • online financial calculators to help you estimate a prepayment charge that could apply if you break your mortgage or prepay more than your prepayment privileges allow
  • toll-free telephone access to knowledgeable staff who can tell you the actual prepayment charge that would apply at the time of your call. You can also ask for a written statement with the amount of the charge
  • an annual statement with information about:
    • your prepayment privileges, including the dollar amount you can prepay each year without triggering a prepayment charge
    • how the lender would calculate a charge
    • factors that could cause the charge to change
    • information about your mortgage that you can use to estimate a charge, such as:
      • the outstanding balance
      • the time left in the term
      • the interest rate
      • other factors the lender uses to calculate the charge (for example, if the lender will use posted interest rates or apply any discount you have received on your interest rate)
    • how the lender determines the comparison rate for charges that are calculated using the interest rate differential (IRD) method, and where you can find the comparison rate
    • any other amounts you would have to pay if you prepay your mortgage, and how the amounts are calculated
    • where you can find the lender’s online financial calculator and the information required to estimate a charge
    • how you can speak with a staff member who is knowledgeable about mortgage prepayment, such as by calling the lender’s toll-free telephone number
  • a written statement if you confirm you will be making a prepayment that will result in a prepayment charge. It must include:
    • the actual prepayment charge
    • how the charge was calculated
    • if the lender calculates your charge using the IRD, certain information used in the calculation, including:
      • the outstanding amount of your mortgage
      • the annual interest rate of your mortgage
      • the term remaining on your mortgage that was used for the calculation
      • the comparison rate that was used for the calculation
    • the period of time the charge will be valid
    • any factors that could cause the charge to change over time
    • any other amounts you will have to pay and how these amounts are calculated

Your responsibilities

Note that some information from lenders that have adopted the voluntary Code of Conduct, such as the written statements, will only be provided to you after you have signed your mortgage agreement.

While you are shopping around for a mortgage, ask questions about prepayment privileges and charges. Follow up with potential lenders by asking about anything that is not clear. Looking at these details closely while shopping for a mortgage could save you thousands of dollars if you want to make prepayments later.

Before signing your mortgage agreement, it is your responsibility to read and understand the terms and conditions, including those related to prepayment privileges and charges.

What you should do if you feel your rights are not being respected

If you feel that a federally regulated financial institution is not respecting your rights, contact the Financial Consumer Agency of Canada.

Prepayment penalties on discounted interest rates

If you negotiated a discounted interest rate, the calculation of the interest rate differential will depend on the lender and the terms of your mortgage contract.

To calculate your prepayment penalty, lenders may use:

  • the advertised interest rate at the time you signed your mortgage and the current posted rate for your term
  • your actual discounted interest rate and apply the discount to the current interest rate
  • your discounted interest rate for your current term and the advertised interest rate at the time the calculation is made

Example: Estimate your prepayment penalty

Suppose you want to break your mortgage contract to get a new contract with a lower interest rate. You want to estimate how much the prepayment penalty will be.

Assume the following:

  • outstanding mortgage balance: $200,000
  • annual interest rate: 6%
  • number of months left in term: 36 months (or 3 years) left in a 5-year term
  • the current posted interest rate for a mortgage with a 36-month term (term of the same length) offered by your lender: 4%

Calculate your prepayment penalty using three months’ interest

Estimate your prepayment penalty using three months’ interest
Step Sample amount Enter your information
Step 1: Identify the outstanding balance on your mortgage. $200,000
Step 2: Multiply the outstanding balance on your mortgage by the annual interest rate on your mortgage. (Write the annual interest rate as a decimal. For example, 6% = 0.06) $200,000 x 0.06 = $12,000
Step 3: Divide the answer by 12 months in a year to get the monthly interest payable. $12,000 / 12 = $1,000
Step 4: Multiply the answer by 3 months. $1,000 x 3 = $3,000
Prepayment penalty estimate based on 3 months’ interest: $3,000

Calculate your prepayment penalty using the interest rate differential

The following example is a simplified way to estimate the interest rate differential. It is for illustration purposes.

Estimate your prepayment penalty using the interest rate differential
Step Sample amount Enter your information
Step 1: Identify the outstanding balance on your mortgage. $200,000
Step 2: Identify the annual interest rate on your mortgage. 6%
Step 3: Identify the current interest rate for the term closest to the remaining time left on your current term. 4%
Step 4: Subtract the answer found in step 2 from the answer found in step 3 to get the difference in interest rates. (Write this interest rate as a decimal. For example, 2% = 0.02) 6% – 4% = 2% = 0.02
Step 5: Multiply the answer from step 4 by the outstanding balance on your mortgage in step 1. 0.02 x $200,000 = $4,000
Step 6: Divide this answer by 12 months in a year to get the monthly interest differential. $4,000 / 12 = $333.33
Step 7: Multiply this answer by the number of months left on the term. $333.33 x 36 = $12,000
Prepayment penalty estimate based on interest rate differential (IRD): $12,000

Paying your prepayment penalty

Your lender may allow you to add a prepayment penalty to your mortgage balance. This means you’ll pay interest on your prepayment penalty. You can also pay your prepayment penalty up front.

Tips to reduce or avoid prepayment penalties

Consider the following options to reduce the amount of money you may pay in penalties.
Make full use of your prepayment privileges

Make full use of your prepayment privileges every year. Any future prepayment penalties will be based on a lower mortgage balance. Make a lump-sum prepayment before you break your mortgage. Although, some lenders will restrict your ability to prepay if you are too close to the date you break your contract. Read your mortgage contract carefully. Ask questions about anything you don’t understand.

Wait until the end of your term to prepay

Consider waiting until the end of your term to prepay if your prepayment penalty will be a large amount. You can then make a lump-sum prepayment without penalty.
Port your mortgage

If you are buying a new home, ask your lender if you can port your mortgage. This means taking your existing interest rate and terms and conditions with you to your new home. It saves you from breaking your mortgage contract and getting a new one.

Shop around

Shop around when you renew your mortgage. Contact various lenders and mortgage brokers to check if there is a better mortgage option that will offer you more flexibility to make prepayments.

Questions to ask your lender about prepayments

When shopping around for a mortgage, look for flexibility in prepayment privileges. Ask your lender the following questions before signing a mortgage contract:
  • how much you can prepay without paying a penalty
  • if there’s a fee for making a prepayment
  • if there’s a minimum or maximum amount for a prepayment
  • when and how often you can make prepayments
  • if there are any conditions related to prepayments
  • if you can re-borrow any prepayments you made

What you need to know about prepayment penalties

If a federally regulated financial institution, such as a bank, issues your mortgage, the following details must appear in an information box at the beginning of your mortgage agreement:
  • prepayment privileges
  • prepayment penalties, that is, prepayment charges
  • other key details
Your lender must tell you how they will calculate your prepayment penalty. Your lender must also tell you what factors are used to determine the penalty. These details must be clear, simple and not misleading.

Read your mortgage contract carefully. Make sure you understand the details about penalties before you sign your contract. Ask questions about anything you don’t understand.

Breaking your mortgage contract

Why break your mortgage contract?

You may find that your current mortgage terms and conditions no longer meet your needs. If you want to change the terms and conditions of your mortgage contract before the end of your term, you’ll need to renegotiate your mortgage contract.

When you renegotiate your mortgage contract, you break your old mortgage contract and replace it with a new one.

You may want to break your mortgage contract, if:

  • interest rates have gone down
  • your financial situation has changed
  • you want to buy a new home and are planning on moving
There may be some significant costs to breaking your mortgage contract.

Read your mortgage contract or ask your lender if breaking your mortgage contact is an option. It is important to consider carefully all the costs and benefits involved.

Cost to break your mortgage contract

If your lender allows you to break your closed mortgage contract, you will usually have to pay a prepayment penalty.

Your lender may agree to reduce your prepayment penalty if you want to break your existing mortgage, but plan to arrange a new one with the same lender.

Before breaking your mortgage contract, find out if you’ll have to pay:

  • a prepayment penalty and, if so, how much
  • an administration fee
  • an appraisal fee
  • a reinvestment fee
  • a fee to remove a charge on your current mortgage and register a new one
You may also have to repay any cash back you received when you first got your mortgage. Cash back is an optional feature where your lender gives you a percentage of your mortgage amount in cash right away.

Early renewal option: Blend-and-extend

Some mortgage lenders may allow you to extend the length of your mortgage before the end of your term. If you choose this option, you’re not required to pay a prepayment penalty. Lenders call this early renewal option the blend-and-extend, because your old interest rate and the new term’s interest rate are blended. You may need to pay administrative fees.

Your lender must tell you how it calculates your interest rate. To find the renewal option that best suits your needs, consider all the costs involved. This includes any prepayment penalty and fees that may apply.

How to calculate a blended interest rate

This method of calculating the blended rate is simplified for illustration purposes. It doesn’t include any prepayment penalties. A prepayment penalty may be blended into the new interest rate or paid when you renegotiate your mortgage.

Example: Calculate a blended interest rate

Suppose interest rates have gone down since you last signed your mortgage contract. To benefit from a lower interest rate, you’re considering breaking your mortgage contract to renegotiate a new mortgage with your existing lender.

Assume the following:

  • mortgage balance: $200,000
  • remaining amortization: 22 years
  • existing interest rate: 5.5%
  • months left in term: 24
  • today’s interest rate for a 5-year term from current lender: 4.0%
  • existing term: 5 years or 60 months
  • payment frequency: monthly
Calculate your new blended interest rate
Steps to calculate a blended interest rate Example Enter your information
Step 3: multiply today’s interest rate by the difference between the number of months of the new term and the number of months remaining on your current term 4% x 36 months = 144
Step 4: add the results of Step 1 and Step 3 132 + 144 = 276
Step 5: divide the results of Step 4 by the number of months in the new term 276 / 60 = 4.6
Step 1: multiply your current interest rate by the number of months remaining on your current term 5.5% x 24 months = 132
Step 2: subtract the number of months of the new term from the number of months remaining on your current term 60 months – 24 months = 36 months
If you choose the blend-and-extend option, your mortgage rate will be 4.6% for the next 60 months.

Breaking your mortgage contract to change lenders

You may decide to renegotiate your mortgage contract and change lenders because another lender offers you a lower interest rate. In this case, you may need to pay a prepayment penalty to break your mortgage contract. Consider if the benefits of breaking your mortgage contract will save you money once you include prepayment penalties and administrative fees.

Example: Costs when you break your mortgage contract to change lenders

Suppose a different lender is offering you 3.75% interest. To break your mortgage contract with your current lender you’ll need to pay a prepayment penalty of $6,000. You may also choose a blend-and-extend option with your current lender. This would give you a 4.6% interest rate.

Example of costs to change lenders
Costs Current lender (using blend-and-extend option) Lender Y Lender X
Interest rate 4.6% 3.75% 3.5%
Interest you’ll pay during a new 5-year term $36,701 $34,350 $32,005
Prepayment penalty $0 $6,000 $6,000
Total cost to renegotiate your mortgage $36,701 $40,350 $38,005

In this example, you pay less when you choose a blend-and-extend option with your current lender.

Note that you’ll usually need to pay fees when you set up a new mortgage, including when you choose a blend-and-extend option. This example doesn’t take into account any fees. Lenders may be willing to pay some or all of the fees. If this is the case, your costs to renegotiate your mortgage will be less.

Pros and cons of breaking your mortgage contract

When interest rates fall, it may be tempting to break your existing mortgage and renegotiate a new one at a lower interest rate, or to blend-and-extend. Before you do, consider the pros and cons.

Pros

  • You get a lower interest rate
  • You may be able to pay off your mortgage faster if you keep your payments the same
  • You can lock in the lower interest rate for the new term of the mortgage

Cons

  • You could end up paying more in the long run because of fees and a prepayment penalty
  • If you plan on selling your home soon, you may not benefit from the potential savings of a lower interest rate

Reverse mortgages

A reverse mortgage is a loan that allows you to get money from your home equity without having to sell your home. You may be able to borrow up to 55% of the current value of your home tax-free.

Eligibility for a reverse mortgage

To be eligible for a reverse mortgage, you must be:

  • a homeowner
  • at least 55 years old

If you have a spouse, both of you must be at least 55 years old to be eligible.

Qualifying for a reverse mortgage

To get a reverse mortgage, your lender will consider:

  • your home equity
  • where you live
  • your age
  • your home’s appraised value
  • current interest rates

In general, the older you are and the more home equity you have when you apply for a reverse mortgage, the bigger your loan will be.

Accessing money with a reverse mortgage

You may choose to get the money from your loan through:

  • lump-sum payment
  • planned advances, giving you a regular income
  • a combination of both of these options

You must first pay off any outstanding loans that are secured by the equity in your home with the funds you get from your reverse mortgage.

You can use the remainder of the loan for anything you wish, such as:

  • pay for home improvements
  • add to your retirement income
  • cover healthcare expenses

Repaying the money you borrow with a reverse mortgage

You don’t need to make any regular payments on a reverse mortgage. You have the option to repay the principal and interest in full at any time. Interest will be charged until the loan is paid off in full. The interest will be added to the original loan amount, which increases the loan amount over time. If you sell your house or if you move out you’ll have to make payments. When you die, your estate will have to repay the loan.

Costs to get a reverse mortgage

Costs associated with a reverse mortgage may include:

  • higher interest rate than for a traditional mortgage
  • a home appraisal fee
  • a closing fee
  • a prepayment penalty if you sell your house or move out within 3 years of getting a reverse mortgage
  • fees for independent legal advice

Shop around and explore your options before getting a reverse mortgage. Compare the costs and impact of the following:

  • getting another type of loan, such as a line of credit or credit card, etc
  • selling your home
  • buying a smaller home
  • renting another home or apartment
  • moving into assisted living, or other alternative housing

Where to get a reverse mortgage

The Canadian Home Income Plan (CHIP), offered by HomEquity Bank, is the only source of reverse mortgage products in Canada. However, your financial institution may also offer similar products that may meet your needs.

Pros and cons of a reverse mortgage

Before you decide to get a reverse mortgage, make sure you consider the pros and cons carefully.

Pros

  • You don’t have to make any regular loan payments
  • You may turn some of the value of your home into cash, without having to sell it
  • The money you borrow is a tax-free source of income
  • This income does not affect the Old-Age Security (OAS) or Guaranteed Income Supplement (GIS) benefits you may be getting
  • You still own your home
  • You can decide how to get the funds

Cons

  • Interest rates are higher than most other types of mortgages
  • The equity you hold in your home may go down as the interest on your loan adds up throughout the years
  • Your estate will have to repay the loan and interest in full within a set period of time when you die
  • The time needed to settle an estate can often be longer than the time allowed to repay a reverse mortgage
  • There may be less money in your estate to leave to your children or other beneficiaries
  • Costs associated with a reverse mortgage are usually quite high compared to a regular mortgage

Questions to ask a lender about reverse mortgages

Before getting a reverse mortgage, ask your lender about:

  • the fees
  • any penalties if you sell your home within a certain period of time
  • how much time will you or your estate have to pay off the loan’s balance if you move or die
  • what happens if it takes your estate longer than the stated time period to fully repay the loan when you die
  • what happens if the amount of the loan ends up being higher than your home’s value when it is time to pay the loan back

Getting pre-approved for a mortgage

Where to get a mortgage

There are a number of different sources for mortgages.

Mortgage lenders

Mortgage lenders lend money directly to you. Mortgages are available from several types of lenders, such as:

  • banks
  • caisses populaires
  • mortgage companies
  • insurance companies
  • trust companies
  • loan companies
  • credit unions
Different lenders may have different interest rates and conditions for similar products. Talk to several lenders to make sure you’re getting the best mortgage product for your needs. Although you may decide to switch lenders later, it’s important to be comfortable with the lender and the mortgage options they offer you right from the start. If you switch lenders after signing your mortgage contract, your lender may charge you a prepayment penalty. Make sure you understand the terms and condition of your mortgage contract.

Mortgage brokers

Mortgage brokers don’t lend money directly to you. Mortgage brokers arrange transactions by finding a lender for you. Some lenders only offer their products directly to borrowers, while some mortgage products are only available through brokers. Since brokers have access to a number of lenders, they may give you a wider range of mortgage products and terms to choose from. Mortgage brokers don’t all have access to the same lenders. This means the available mortgages vary from broker to broker. When you’re considering a mortgage broker, ask which lenders they deal with. Mortgage brokers generally don’t charge fees for their services although this depends on the lender – they usually receive a commission from the lender when they arrange a transaction.

The pre-approval process

A pre-approval is when a potential mortgage lender looks at your finances to find out the maximum amount they will lend you and what interest rate they will charge you.

With a pre-approval, you can:

  • know the maximum amount of a mortgage you could qualify for
  • estimate your mortgage payments
  • lock in an interest rate for 60 to 120 days, depending on the lender
The pre-approval amount is the maximum you may get. It does not guarantee that you will get a mortgage loan for that amount. The approved mortgage amount will depend on the value of your home and the amount of your down payment. It may be a good idea to also look at properties in a lower price range so that you don’t stretch your budget to its limit.

Remember that you’ll also need money for:

  • closing costs
  • moving costs
  • ongoing maintenance costs

What to provide to your lender to get pre-approved

Before pre-approving you, a lender will look at your current assets (what you own), your income and your current level of debt.

You’ll need to provide your lender or mortgage broker with the following:
  • identification
  • proof of employment
  • proof you can pay for the down payment and closing costs
  • information about your other assets, such as a car, cottage or boat
  • information about your debts or financial obligations
For proof of employment, your lender or mortgage broker may ask you to provide:
  • proof of current salary or hourly pay rate (for example, a current pay stub and a letter from your employer)
  • your position and length of time with the organization
  • Notices of Assessment from the Canada Revenue Agency for the past two years, if you’re self-employed
For proof you can pay the down payment, your lender or mortgage broker may ask you to provide recent financial statements from bank accounts or investments.
Your debts or financial obligations may include:
  • credit card balances and limits, including those on store credit cards
  • child or spousal support amounts
  • car loans or leases
  • lines of credit
  • student loans
  • other loans

Questions to ask your lender or broker when getting pre-approved

When getting pre-approved, ask your broker or lender the following:
  • how long they guarantee the pre-approved rate
  • will you automatically get the lowest rate if interest rates go down while you are pre-approved
  • if the pre-approval can be extended

Qualify for a mortgage

To qualify for a mortgage, you’ll have to prove to your lender that you can afford the amount you are asking for. Mortgage lenders or brokers will use your financial information to calculate your total monthly housing costs and total debt load to determine what you can afford.

Lenders will consider information such as:

  • your income (before taxes)
  • your expenses (including utilities and living costs)
  • the amount you’re borrowing
  • your debts
  • the amortization period

Total monthly housing costs

Your total monthly housing costs shouldn’t be more than 32% of your gross household income. This percentage is also known as the gross debt service ratio. These housing-related costs include:

  • mortgage payments
  • property taxes
  • heating
  • 50% of condo fees (if applicable)

Total debt load

Your total debt load shouldn’t be more than 40% of your gross income. This includes your total monthly housing costs plus all of your other debts. This percentage is also known as the total debt service ratio. Other debts may include the following:

  • credit card payments
  • car payments
  • lines of credit
  • student loans
  • child or spousal support payments
  • any other debts

Qualifying rates for certain types of mortgages

Lenders use a qualifying interest rate to determine how much you can afford and if you meet their lending criteria.

To determine if you qualify for a mortgage, the lender will use the higher interest rate of either:

  • the Bank of Canada’s conventional five-year fixed posted mortgage rate
  • your negotiated interest rate or the interest rate in your mortgage contract

You must qualify at the higher interest rate if you have an insured mortgage even if you plan on getting a mortgage with a lower interest rate.

For example:

  • your mortgage contract offers an interest rate of 2.75%
  • the Bank of Canada’s five-year fixed posted rate is 4.64%

You would need to qualify at the higher of the two interest rates, which is the Bank of Canada’s five-year fixed posted rate, even if you will be paying the lower interest rate in your mortgage contract.

Questions to ask when shopping for a mortgage

Compare the whole package offered by each lender. Ask about:
  • the interest rate
  • the term
  • the amortization period
  • the fees you have to pay
  • your payment options
  • your prepayment options
  • ways you can save on interest
  • penalties if you sell your property before the end of your term
  • options if you want to pay your entire mortgage off early
  • transferring the remaining amount of your mortgage and the terms to a new property without paying a penalty if you sell your home
  • registering the mortgage with a standard or collateral charge

Negotiate your mortgage contract

Once a lender decides to lend you money, you’ll have to negotiate the terms and conditions of the mortgage, such as:

  • the amount
  • the amortization period
  • the term
  • how often you will make payments
  • the interest rate
  • if it is an open or closed mortgage

Read your mortgage contract carefully and be sure to ask about anything you don’t understand. Federally regulated financial institutions, such as banks, must clearly give you key details about the loan agreement in an information box at the beginning of your contract.

Paying off your mortgage faster

Putting extra money toward your mortgage

To pay off your mortgage faster, consider putting extra money toward your mortgage.

Your mortgage contract may allow you to:

  • increase the amount of your regular payments
  • make a lump-sum payment
This a prepayment or prepayment privilege.
Increase your payments

Increasing the amount of your regular payments, even by a small amount, may help you pay off your mortgage faster. You may only be able to increase your payments by a certain amount each year. The amount will be indicated in your mortgage contract. If you increase your payments by more than your prepayment privileges allow, you may have to pay a prepayment penalty. Normally, once you decide to increase your payments, you won’t be allowed to lower them until the end of the term. The term is the period of time that your mortgage agreement is in effect, including your interest rate and terms and conditions. Check your mortgage contract or contact your mortgage lender to find out about your prepayment options.

Example: increasing your payments

Suppose you’re considering a mortgage of $200,000 that you’ll pay back over 25 years. You want to decide if paying $100 more a month will help you save money.

Assume the following

  • your interest rate is fixed at 4% for 5 years
  • your mortgage lender tells you that you must pay at least $1,052 a month

Assume that your interest rate of 4% remains the same throughout your 25-year mortgage.

Example of increased payments
Monthly payment at $1,052 Monthly payment at $1,152
Principal (total amount of your loan) $200,000 $200,000
Interest (amount you pay to borrow money) $115,612 $99,853
Total amount you pay for your home $315,612 $299,853
Savings on the interest owed to your lender $0 $15,759
Number of years required to pay off your mortgage 25 years 21.5 years

If you pay an extra $100 a month during the life of the mortgage, you would:

  • save almost $16,000
  • pay off the mortgage more than 3.5 years earlier

Make a lump-sum payment

You can make a lump-sum payment on top of your regular mortgage payments to reduce the outstanding balance of your mortgage. You may only be able to put a limited amount of money toward your mortgage. The amount will be indicated in your mortgage contract. If you put more money toward your mortgage that your prepayment privileges allow, you may have to pay a prepayment penalty.

Lump-sum payments can be made:
  • before the end of your mortgage term
  • at the end of your term
  • at certain times during your mortgage contract
  • on certain dates set out in your mortgage contract

Check your mortgage contract or ask your mortgage lender to find out about your prepayment options.

Example: making a lump-sum payment

Suppose you’ve got a mortgage of $350,000 that you’ll pay back over 25 years. Throughout the year, you were able to save an extra $10,000 to put toward your mortgage. You decide to put the money toward your mortgage at the start of your term’s second year. Your mortgage contract allows you to make one lump-sum payment per year that is no more than 10% of what you owe on your mortgage. This means you can make a prepayment up to $35,000 ($350,000 x 10%). Assume that the interest rate of 4% would remain the same for the rest of the mortgage.

Example of making a lump-sum prepayment on your mortgage
No prepayment Prepayment of $10,000
Principal (amount you owe on your mortgage) $350,000 $350,000
Interest (amount you pay to borrow money) $202,321 $186,079
Total amount you pay for your home $552,321 $536,079
Savings on the interest owed to your lender $0 $16,242
Number of years required to pay off your mortgage 25 years 23.8 years

Making a $10,000 prepayment toward your mortgage would:

  • allow you to pay off your mortgage more than 1 year earlier
  • reduce how much interest you will pay by more than $16,000

Prepayment penalties

If you put more money toward your mortgage than the maximum amount allows, you may have to pay a prepayment penalty. Read your mortgage contract carefully – make sure you understand the details about penalties.

Keep your monthly payments the same when you renew your mortgage

When you renew or renegotiate your mortgage, you may be able to get a lower interest rate. If so, you’ll have the option to reduce the amount of your regular payments. If you decide to keep your regular payments the same, you will be able to pay off your mortgage faster.

Example: keeping the payments the same when you renew your mortgage

Suppose you’ve got a mortgage of $200,000 that you’ll pay back over 20 years. Your payments are $1,314 each month. When you renew your mortgage after a 5-year term, your interest rate has gone down from 5% to 4%. You want to decide if you’ll pay the new minimum monthly payment of $1,230 or continue to pay $1,314 each month.

Assume the following:

  • the amount you owe on your mortgage is $166,757
  • you renew your mortgage for another 5 year term
  • your new minimum monthly payment is $1,230 each month

Assume that the new interest rate of 4% would remain the same for the rest of the mortgage.

Example of keeping payments the same when you renew your mortgage with reduced interest rates
Monthly payment at $1,230
(new minimum payment)
Monthly payment at $1,314
(keep payment the same)
Principal (remaining amount you owe on your mortgage) $166,757 $166,757
Interest (amount you pay to borrow money) $54,776 $49,763
Total amount left to pay for your home $221,532 $216,519
Savings on the interest owed to your lender $0 $4,982
Number of years left to pay off your mortgage 15 years 13.9 years

By keeping your monthly payments the same at the lower interest rate for the rest of your mortgage, you would:

  • save almost $5,000
  • pay off the mortgage over 1 year earlier

You may also consider making accelerated weekly or accelerated biweekly payments.

Choose an accelerated option for your mortgage payments

An accelerated payment option lets you make weekly or biweekly payments while putting about the same amount of money toward your mortgage as a monthly payment. Accelerated payments can save you money on interest charges. By accelerating your payments, you make the equivalent of one extra monthly payment per year. You’ll likely not notice a big difference in the amount of your payments, yet it may save you a lot of money in interest. Check your mortgage contract or contact your mortgage lender to know more about your payment options.

Renewing your mortgage

Your renewal statement

If your mortgage contract is with a federally regulated financial institution, such as a bank, the lender must provide you with a renewal statement at least 21 days before the end of the existing term.

A renewal statement must contain the same type of information that is in your current mortgage contract, such as:

  • the balance or remaining principal at the renewal date
  • the interest rate
  • the payment frequency
  • the term
  • any charges or fees that apply

The renewal statement must also specify that the interest rate offered in the renewal statement won’t increase until your scheduled renewal date. The financial institution may provide the statement to you as a paper document, or electronically if you consent to receive required information in electronic format. You may receive a mortgage renewal contract at the same time as a renewal statement. If your lender decides not to renew your mortgage, it must notify you at least 21 days before the end of your term.

Review your mortgage needs

When your mortgage term comes to an end, you’ll need to pay off your mortgage or renew it for another term. This is a good time to review your needs and make sure you have the right mortgage if your needs have changed.

Ask the following questions to help you find the right mortgage:

  • does your budget allow you to increase your mortgage payments so you can pay off your mortgage sooner and save on interest charges?
  • do you want to change your payment frequency? For example, switching from monthly payments to accelerated bi-weekly payments may let you pay off your mortgage more quickly.
  • do you think you are likely to make additional prepayments?
  • are you satisfied with the services offered by your current lender?
  • do you want to consolidate other debts that have higher interest rates and increase the amount of your mortgage loan?
Shop around

You don’t have to renew your mortgage with the same lender. You can choose to move your mortgage to another lender if it offers you terms and conditions that better suit your needs. Start shopping around a few months before the end of your mortgage term. Contact various lenders and mortgage brokers to check if there is a mortgage option with terms and conditions that better suit your needs. Don’t wait until you receive the renewal letter from your lender. Negotiate with your current lender. You may qualify for a discounted interest rate that is lower than the rate quoted in your renewal letter. When you negotiate an interest rate, tell your lender about offers you have received from other financial institutions or mortgage brokers. If you don’t take action, your mortgage may automatically be renewed for another term. This means that you may not get the best interest rate and conditions. If your lender will automatically review your mortgage, it will say so in the renewal statement.

Switch to another lender

You may decide to switch your current mortgage loan to another mortgage lender for a loan of the same amount. If this is the case, the new lender will need to approve your mortgage application. The criteria the new lender uses to decide if you qualify for a mortgage may be different from those used by your original lender.

Costs to change lenders

Make sure you find out the costs of changing lenders, such as:

  • set-up fees with the new lender, which may include fees to discharge the previous mortgage and register the new mortgage
  • a transfer or assignment fee from your current lender
  • an appraisal fee to confirm the value of your property (if necessary)
  • other administration fees
Ask if your new mortgage lender is willing to pay for some or all of your costs to switch.

Mortgage loan insurance premiums when you switch lenders

If your mortgage was previously insured, you may be required to pay a new mortgage loan insurance premium when you switch lenders, if:

  • the amount of your loan has increased
  • you extended the amortization period, that is, the length of time it will take you to pay off your mortgage
To avoid paying mortgage loan insurance premiums twice, tell your new lender that you already have mortgage loan insurance on your existing mortgage. Ask your existing lender for a certificate number. They should provide you with a copy of the insurance certificate when you receive your mortgage contract. You may also need to meet with your lawyer (or notary in Quebec and British Columbia) to sign the registration documents that are part of your mortgage contract.

Switching mortgage lenders if you have a collateral charge

If you want to switch lenders and your mortgage is registered with a collateral charge, you will likely need to pay fees to remove the charge from your existing mortgage and register a new one with the new lender. To remove the charge from your mortgage, you must repay in full or transfer to the new lender all loan agreements secured by the collateral charge, such as car loans or lines of credit. To find out if your mortgage has a standard or a collateral charge, ask your lender or your lawyer (or notary in Quebec or British Columbia) well before your renewal date. This will allow you time to consider your options based on how your mortgage is registered.

Borrowing against home equity

Why borrow against home equity?

Home equity is the difference between the value of your home and the unpaid balance of your current mortgage. For example, if your home is worth $250,000 and you owe $150,000 dollars on your mortgage, you would have $100,000 in home equity.

Your home equity goes up in two ways:

  • as you pay down your mortgage
  • if the value of your home increases

You may be able to borrow money that will be secured by your home equity. Interest rates on loans secured with home equity can be much lower than other types of loans. You must be approved before you can borrow from your home equity. Be aware that you could lose your home if you’re unable to repay a home equity loan. Not all financial institutions offer home equity financing options. Ask your financial institution which financing options they offer.

Compare your options

Decide which type of loan best suits your needs, compare the different features of each option.

Compare your options to get money from home equity
Refinance your home Borrow prepaid amounts Home equity line of credit (HELOC) Second mortgage
Credit limit 80 % of your home’s appraised value, minus the unpaid balance of the existing mortgage Total of amounts prepaid 65 % to 80 % of your home’s appraised value 80 % of your home’s appraised value, minus the unpaid balance of the existing mortgage
Interest rates Fixed or variable. May result in a change to the existing interest rate on your mortgage or a different interest rate for the refinanced portion Blended or same as your existing mortgage Variable. Will change as market interest rates go up or down Fixed or variable. Generally higher than on the first mortgage
Access to money One lump sum deposited to your bank account One lump sum deposited to your bank account As needed, using regular banking methods One lump sum deposited to your bank account
Fees Administrative fees may include:

  • appraisal fees
  • title search
  • title insurance
  • legal fees
None Administrative fees may include:

  • appraisal fees
  • title search
  • title insurance
  • legal fees
Administrative fees may include:

  • appraisal fees
  • title search
  • title insurance
  • legal fees

Refinance your home

You can borrow up to 80% of the appraised value of your home, minus what you have left to pay on your mortgage, home equity line of credit or any other loans that are secured against your home.

Your lender may agree to refinance your home with the following options:
  • a second mortgage
  • a home equity line of credit
  • a loan or line of credit secured with your home

The money you borrow may be deposited in your bank account all at once.

Example: Refinancing your home

Suppose you want to refinance your home to pay for renovations. Your house is currently worth $300,000 on the real estate market. You still owe $175,000 on your mortgage.

If your lender agrees to refinance your home to the $65,000 limit, you would owe a total of $240,000 on your mortgage.

Example of refinancing your home
Appraised value of your home $300,000
Maximum loan you may get x 80%
Loan amount based on appraised value of your home = $240,000
Less balance you owe on your mortgage – $175,000
Refinancing credit limit $65,000

Interest rates and fees if you refinance your home

The interest rate on the refinanced part of your mortgage may be different from the interest rate on your original mortgage. You may also have to pay a new mortgage loan insurance premium if your existing mortgage amount is modified.

You may have to pay administrative fees which include:

  • appraisal fees
  • title search
  • title insurance
  • legal fees

You may have to change the terms of your original mortgage agreement.

Borrow on amounts you prepaid

You may be able to re-borrow money that you prepaid. If you have made lump-sum payments on your mortgage, your lender may allow you to re-borrow that money. You can borrow total amount of all the prepayments you made. Any money you re-borrow will be added to the total of your mortgage. The money you borrow may be deposited in your bank account all at once.

Example: Borrow on amounts you prepaid

Suppose you want to borrow money to pay for home renovations that will cost $15,000.

Assume the following:

  • you have held your mortgage for three years
  • you have $250,000 left to pay on your mortgage
  • over the past 3 years, you have prepaid an extra $20,000 against your mortgage

If your financial institution allows you to borrow $15,000 from the amount you prepaid, you will owe $265,000 ($250,000 + $15,000) on your mortgage.

Interest rates and fees if you borrow on amounts you prepaid

You will pay either a blended interest rate or the same interest rate as your mortgage on the amount you borrow. A blended interest rate combines your current interest and the rate currently available for a new term. Fees vary between lenders. Make sure to ask your lender what fees you’ll need to pay. You may not have to make any changes to your mortgage term.

Get a home equity line of credit

A home equity line of credit (HELOC) works much like a regular line of credit. You can borrow money whenever you want, up to the credit limit. You can take out money from a home equity line of credit when you need to by using your regular banking methods. You pay it back and borrow again. This line of credit is secured by your home. You can borrow up to 65% of your home’s appraised value from a federally regulated financial institution, such as a bank. You can borrow up to 80% of your home’s appraised value if your lender combines your home equity line of credit limit with the balance remaining on your mortgage. The more equity you have in your home, the more you are able to borrow with a home equity line of credit.

Example: Borrowing money from a home equity line of credit

Suppose you want to borrow money for home repairs. You decide to use a home equity line of credit.

Assume the following:

  • your home is worth $250,000, according to an appraisal
  • you owe $150,000 on your mortgage
Example of a home equity line of credit
Appraised value of your home $250,000
Potential maximum loan for home equity line of credit and regular mortgage combined x 80%
Loan amount based on appraised value = $200,000
Less balance you owe on your mortgage – $150,000
Credit limit for a home equity line of credit $50,000

Interest rates and fees on a home equity line of credit

The interest rate for a home equity line of credit is usually variable. This means interest rates will change as market interest rates go up or down. Your payments may go up if rates rise. You may have the option to just pay the interest due on a home equity line of credit instead of a set payment amount. However, making interest-only payments will increase the overall cost of your loan and affect how long it will take you to repay it. It can be very easy to borrow money with a home equity line of credit. Make sure you can still repay it if interest rates, and your payments, go up in the future. As long as you make the minimum monthly payments, you can generally add extra payments to a home equity line of credit whenever you want. You don’t need to pay a fee for doing this. Federally regulated financial institutions must give you certain key details in your credit agreement or in a separate disclosure statement.

Home equity line of credit instead of a traditional mortgage

Your lender may offer you a home equity line of credit instead of a traditional mortgage. This product may be split into portions that you repay in different ways. For example, a home equity line of credit may have a portion with a fixed interest rate and another portion with a variable interest rate. When it comes to making lump-sum payments, you may generally prepay any amount whenever you want on the home equity line of credit portion without paying a prepayment charge. Your lender may apply prepayment charges to any other portion that has a closed term.

Get a second mortgage

A second mortgage is a second loan that you take on your home. You can borrow up to 80% of the appraised value of your home, minus the balance on your first mortgage. The loan is secured with your home equity. While you pay off your second mortgage, you also need continue to pay off your first mortgage. If you can’t make your payments and your loan goes into default, you may lose your home. Your home will be sold to pay off both your first and second mortgage. Your first mortgage lender would be paid first. Your lender may deposit all the money in your bank account all at once.

Example: Getting a second mortgage

Suppose you need money to pay for your child’s post-secondary education. Consider how much you may be able to borrow with a second mortgage.

Assume the following:

  • your home is worth $250,000, according to an appraisal
  • you owe $150,000 on your mortgage
Example of a second mortgage
Appraised value of your home $250,000
Maximum loan allowed x 80%
Loan amount based on appraised value = $200,000
Less balance you owe on your mortgage – $150,000
Second mortgage credit limit $50,000

Interest rates and fees on second mortgages

Interest rates on second mortgages are usually higher than on first mortgages because they are riskier for lenders.

You may have to pay administrative fees such as:

  • an appraisal fees
  • title search fees
  • title insurance fees
  • legal fee

Protecting yourself if interest rates rise

How a rise in interest rates affects you

A rise in interest rates can cost you more to borrow money.

When interest rates rise, your loan payments will increase if:

  • you have a mortgage, a line of credit or other loans with variable interest rates
  • you’ll soon need to renew a fixed interest-rate mortgage or loan

Preparing for a rise in interest rates

Pay down debt as much as possible to prepare for a rise in interest rates. If you have less debt, you may be able to pay it off more quickly. This will help you avoid financial stress caused by bigger loan payments.

Here are ways to prepare for a rise in interest rates.

  • Cut expenses so you have more money to pay down your debt
  • Pay down the debt with the highest interest rate first so you pay less money towards interest
  • Consider consolidating debts with high interest rates, such as credit card debts, into a loan with a lower interest rate but keep your payments the same
  • Avoid getting the biggest mortgage or line of credit that you are offered
  • Consider how borrowing more money could limit your ability to save for your goals
  • Find ways to increase your income to help you pay down debt
  • Make sure you have an emergency fund to deal with unplanned costs

How interest rates work

If you’re borrowing money, interest is the amount you pay to your lender for the use of the money. Financial institutions set the interest rate for your loan. Interest rates rise and fall over time. The interest rate is used to calculate how much you need to pay to borrow money. The interest rate for your loan is included in your loan agreement. Find out what your financial institution must tell you about interest rates when you borrow.

Fixed and variable interest rate loans

When you borrow money, your financial institution may be offer you a choice between a fixed interest rate loan and a variable-rate loan.

Fixed interest rates stay the same for the term of the loan.

Variable interest rates may increase or decrease over the term of the loan. Keep in mind that some lenders may offer you a lower introductory rate for a set period of time for certain types of loans. Make sure you can still afford the payments at the regular, higher interest rate.

Examples of the effect of an interest rate rise on your monthly loan payments

The following examples show you how each loan payment will be affected if interest rates rise.

How a rise in interest rates will affect your mortgage payments

Suppose you have a mortgage of $278,748 with a variable interest rate. Your interest rate is currently 3.1%. You have 23 years left in your amortization (or repayment) period. Your mortgage payment will increase by $457 a month if interest rates rise by 3%.

How much your monthly mortgage payments will increase if interest rates rise

Figure 1: How much your monthly mortgage payments would increase if interest rates were to rise

How a rise in interest rates will affect your personal loan

Suppose you have a personal loan of $6,000 with a variable interest rate of 4.75%. Your interest rate is currently 4.75%. You want to pay it off in two years.

Your loan payment will increase by $9 a month if interest rates rise by 3%. That adds up to $108 more per year.

How much your monthly personal loan payments will increase if interest rates rise

Figure 2: How much your monthly personal loan payments would increase if interest rates were to rise

How a rise in interest rates will affect your car loan payments

Suppose you have a car loan of $10,000 with a fixed interest rate of 5.5%. You have three years left in your term. Your monthly payments are $302.

Your monthly payments won’t increase if interest rates rise because the interest rate on your loan is fixed. However, if you have to put more money toward other loans when interest rates rise, you may have difficulty with, or may no longer be able to make, your car payments.

If you need to renew or renegotiate your loan, your loan payments may increase if interest rates rise.

How a rise in interest rates will affect your credit card debt payments

Suppose you have a credit card debt of $6,500 with a fixed interest rate of 19.9%. Your monthly payments are $330. You want to pay off your debt in two years.

Since you have a fixed interest rate on your credit card, your monthly payments will only increase if you choose to pay more each month. However, you may have less money to put towards your credit cards if the interest rates on your other loans increase. It may then take you longer to pay off your credit card, which will cost you more in interest in the long run.

If you can no longer make your minimum monthly payments by the due date, the financial institution that issued your credit card may increase your interest rate. It may increase by as much as 5%.

Banks and other federally regulated financial institutions must notify you before an interest rate increase takes effect.

How a rise in interest rates will increase your total loan payments

In the examples given above, your total monthly loan payments increase if interest rates rise. The following example shows you how all loan payments would be affected if interest rates were to rise.

Suppose you have the following loans:

  • a variable interest rate mortgage of $278,748
  • a variable interest rate personal loan of $6,000
  • a fixed interest rate car loan of $10,000
  • a fixed interest rate credit card debt of $6,500

In this example, a rise in interest rates means, you’ll pay $466 more a month in loan payments if rates were to rise by 3%. That adds up to $5,592 more per year.

How your total monthly loan payments will increase if interest rates rise

Figure 3: How your total monthly loan payments would increase if interest rates were to rise.

Figure out if higher monthly debt payments fit into your budget

  • Talk to your lenders to find out how much your payments would increase if interest rates were to rise by 0.5%, 1%, 2% and 3%
  • Look at how the higher payments would impact your monthly budget and your ability to save for your goals
  • If you’re outside your comfort zone, look at how you can reduce expenses or earn more money to pay off your debt faster

Source: Financial Consumer Agency of Canada

Mortgage Terminology Explained

Agreement of Purchase and Sale
A legal agreement that offers a certain price for a home. The offer may be firm (no conditions attached), or conditional (certain conditions must be fulfilled before the deal can be closed).

Amortization Period
The time over which all regular payments would pay off the mortgage. This is usually 25 years for a new mortgage, however can be greater, up to a maximum of 30 years.

Appraisal
The process of determining the value of property, usually for lending purposes. This value may or may not be the same as the purchase price of the home.

Appraisal Value
An estimate of the market value of the property.

Blended Payments
Payments consisting of both a principal and an interest component, paid on a regular basis (e.g. weekly, biweekly, monthly) during the term of the mortgage. The principal portion of payment increases, while the interest portion decreases over the term of the mortgage, but the total regular payment usually does not change.

Canada Mortgage and Housing Corporation (CMHC)
The National Housing Act (NHA) authorized Canada Mortgage and Housing Corporation (CMHC) to operate a Mortgage Insurance Fund which protects NHA Approved Lenders from losses resulting from borrower default.

Certificate of Location or Survey
A document specifying the exact location of the building on the property and describing the type and size of the building including additions, if any.

Certificate of Search or Abstract of Title
A document setting out instruments registered against the title to the property, e.g. deed, mortgages, etc.

Closed Mortgage
A mortgage agreement that cannot be prepaid, renegotiated or refinanced before maturity, except according to its terms.

Closing Costs
Various expenses associated with purchasing a home. These costs can include, but are not limited to, legal/notary fees and disbursements, property land transfer taxes, as well as adjustments for prepaid property taxes or condominium common expenses, if any.

Closing Date
The date on which the sale of a property becomes final and the new owner usually takes possession.

CMHC, Genworth Financial Canada or Canada Guaranty Insurance Premium
Mortgage insurance insures the lender against loss in case of default by the borrower. Mortgage insurance is provided to the lender and the premium is paid by the borrower.

Conditional Offer
An offer to purchase subject to conditions. These conditions may relate to financing, or the sale of an existing home. Usually a time limit in which the specified conditions must be satisfied is stipulated.

Conventional Mortgage
A mortgage that does not exceed 80% of the purchase price of the home. Mortgages that exceed this limit must be insured against default, and are referred to as high-ratio mortgages (see below).

Debt-Service Ratio
The percentage of the borrower’s gross income that will be used for monthly payments of principal, interest, taxes, heating costs and condominium fees.

Deed (Certificate of Ownership)
The document signed by the seller transferring ownership of the home to the purchaser. This document is then registered against the title to the property as evidence of the purchaser’s ownership of the property.

Deposit
A sum of money deposited in trust by the purchaser when making an offer to be held in trust by the vendor’s agent, broker, lawyer or notary until the closing of the transaction.

Equity
The interest of the owner in a property over and above all claims against the property. It is usually the difference between the market value of the property and any outstanding encumbrances.

Fire Insurance
Before a mortgage can be advanced, the purchaser must have arranged fire insurance. A certificate or binder from the insurance company may be required on closing.

Firm Offer
An offer to buy the property as outlined in the offer to purchase with no conditions attached.

Fixed-Rate Mortgage
A mortgage for which the rate of interest is fixed for a specific period of time (the term).

Foreclosure
A legal procedure whereby the lender eventually obtains ownership of the property after the borrower has defaulted on payments.

Gross Debt Service (GDS) Ratio
The percentage of gross income required to cover monthly payments associated with housing costs. Most lenders recommend that the GDS ratio be no more than 32% of your gross (before tax) monthly income.

Gross Household Income
Gross household income is the total salary, wages, commissions and other assured income, before deductions, by all household members who are co-applicants for the mortgage.

High Ratio Mortgage
If you don’t have 20% of the lesser of the purchase price or appraised value of the property, your mortgage must be insured against payment default by a Mortgage Insurer, such as CMHC.

Holdback
An amount of money required to be withheld by the lender during the construction or renovation of a house to ensure that construction is satisfactorily completed at every stage.

Home Equity
The difference between the price for which a home could be sold (market value) and the total debts registered against it.

Inspection
The examination of the house by a building inspector selected by the purchaser.

Interest Rate Differential Amount (IRD)
An IRD Amount is a prepayment charge that may apply if you pay off your mortgage principal prior to the maturity date or pay the mortgage principal down beyond the prepayment privilege amount. The IRD amount is equivalent to the difference between your annual interest rate and the posted interest rate on a mortgage that is closest to the remainder of the term less any rate discount you received, multiplied by the amount being prepaid, and multiplied by the time that is remaining on the term.

Interim Financing
Short-term financing to help a buyer bridge the gap between the closing date on the purchase of a new home and the closing date on the sale of the current home.

Maturity Date
Last day of the term of the mortgage agreement.

Mortgage Critical Illness Insurance
Mortgage Critical Illness Insurance is available as an enhancement to Mortgage Life Insurance. Mortgage Critical Illness Insurance is underwritten by the Canada Life Assurance Company. Complete details of benefits, exclusions and limitations are contained in the Certificate of Insurance. It is recommended for all mortgagors. It can pay off your mortgage — up to $300,000 — if you are diagnosed with life-threatening cancer, heart attack or stroke.

Mortgagee and Mortgagor
The lender is the mortgagee and the borrower is the mortgagor.

Mortgage Life Insurance
A form of reducing term insurance recommended for all mortgagors. If you die, have a terminal illness, or suffer an accident, the insurance can pay the balance owing on the mortgage. The intent is to protect survivors from the loss of their homes.

Mortgage Term
The number of years or months over which you pay a specified interest rate. Terms usually range from six months to 10 years.

Open Mortgage
A mortgage which can be prepaid at any time, without requiring the payment of additional fees.

Payment Frequency
The choice of making regular mortgage payments every week, every other week, twice a month or monthly.

P.I.T.
Principal, interest and taxes. Together, these make up the regular payment on a mortgage if you elect to include property taxes in your mortgage payments.

Porting
This allows you to move to another property without having to lose your existing interest rate. You can keep your existing mortgage balance, term and interest rate plus save money by avoiding early discharge penalties.

Prepayment Charge
Compensation when the borrower prepays all or part of a closed mortgage more quickly than is allowed as set out in the mortgage agreement.

Prepayment Option
The ability to prepay all or a portion of the principal balance. Prepayment charges may be incurred on the exercise of prepayment options.

Principal
The amount of money borrowed for a new mortgage.

Refinancing
Renegotiating your existing mortgage agreement. May include increasing the principal or paying out the mortgage in full.

Renewal
At the end of a mortgage term, the mortgage may “roll over” on new terms and conditions acceptable to both the lender and the borrower. This is known as renewing a mortgage. Otherwise, the lender is entitled to be repaid in full. In this case, the borrower may seek alternative financing.