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Fixed Rate Mortgages
The two basic types of mortgages are variable (or adjustable) rate mortgages and fixed-rate mortgages. The majority of financial institutions offer a variety of products based on these two common types of mortgages, with slight variations in regards to features. Fixed-rate mortgages, like any other financial product, are associated with a number of features that everyone needs to be aware of in order to determine whether it will suit their particular needs.
What are Fixed-Rate Mortgages?
Every type of loan is associated with a particular interest rate. The interest rate will depend on the type of loan, the duration of the loan, the customer's financial profile and the amount of money that is being borrowed. With fixed-rate mortgages, the interest rate is fixed and will remain the same throughout the duration of the home loan. Monthly payments for a fixed-rate mortgage loan are comprised of a percentage of the principal amount plus interest. One of the biggest advantages provided by a fixed-rate mortgage is that the monthly payments will always be the same for the term of the loan. This has considerable budgeting advantages.
What are closed and open mortgages?
Additionally, fixed rate mortgages can be open or closed. A fixed-rate closed mortgage is a mortgage which cannot be fully prepaid, renegotiated, or refinanced before the mortgage term reaches full maturity without some sort of additional charges (e.g. three months worth of interest). On the other hand, an open mortgage can be prepaid, in part or in full, at any time during the mortgage term, without the penalties associated with a closed mortgage.
Interest rates for a closed mortgage are typically lower than the rates offered for an open mortgage. This might not be as stringent as it sounds. Many lenders will allow you to increase your monthly payments on your fixed-rate closed mortgage or make lump sum payments once a year up to a certain percentage of the mortgage without penalties and/or other charges.
Mortgage Term & Amortization Schedule
Fixed-mortgage loans will pretty much be comprised of the same type of features irrespective of your choice regarding a lender. However, the key factor to take note of is the mortgage term that you will end up choosing. Mortgage term is the length of the current mortgage agreement with your lender. In Canada, typical mortgage terms offered by lenders go from 1 to 10 years. At the end of the term, you'll have the option to fully repay your mortgage loan with the lender or sign a new mortgage agreement at current mortgage rates.
In addition, every loan is subject to an amortization schedule. Amortization is the time span required to fully repay your mortgage based on a set number of fixed payments, that is, it is an estimation of how long you will be paying off your mortgage. Amortization periods in Canada range from 1 to 25 years. Both long and short amortization periods have their respective benefits. The longer the amortization period, the smaller your mortgage payments, however you will pay more in the long run due to compound interest.
As an example: a mortgage can have a term of 5 years, amortized in 25 years, which seems to be the most popular option in Canada.
Choosing a Mortgage Term
If you want your monthly payments to be as low as possible, then you will definitely want to opt for a 25-year mortgage amortization term. However, beware: with this option, you will end up paying a considerable amount of interest: the longer the amortization term, the more interest you pay.
With a shorter mortgage amortization term, paid off in 10 or 15-years for example, you are going to be subject to higher monthly payments. The good part is that not only will you be able to pay off the loan in a shorter period of time, but you will also be able to obtain a lower interest rate, which will reduce your overall expense.
Is a Fixed-Rate Mortgage Loan the Right Choice for You?
The answer to the above question requires careful analysis of your financial condition. This means that you are going to have to take a careful look at your sources of income and how much you are able to make during a single month to afford your loan payments. You are also going to have to carefully consider your monthly expenses as well as your inclination towards saving for post-retirement life.
Advantages of choosing a fixed-rate mortgage
A fixed-rate mortgage can be a great option for potential homeowners. It is important to take time to choose the right type of loan to ensuring that you are able to remain within your financial limitations.
The main advantage associated with a fixed-rate mortgage is that it will protect you from any sudden or volatile changes that may occur in regards to the interest rate as your payments stay the same for the duration of the term. With an adjustable-rate mortgage, a sudden rise in the interest rate can raise your monthly payments and lead to missed payments as well as budgeting issues. So, in times of volatile markets, choosing a fixed-rate mortgage may be your best bet.
The most popular fixed mortgage rate products at KANETIX are:
Additional Mortgage Resources
KANETIX has a wealth of resources to help you on your home buying journey. Our mortgage information centre has a large collection of articles to keep you in the know. If you want to know about things like the new mortgage rules that affect the Canadian housing market or tips to pay off a mortgage sooner and choosing between mortgage insurance or life insurance then the infocentre is for you. Also, we have a mortgage glossary for your reference to look up finance terms you may not already know.
Our mortgage payment calculator find out how much total interest you will be paying over the life of your mortgage lets you discover how things like your mortgage amount, rate, payment frequency and amortization period affects your mortgage payment. KANETIX also has the most effective tools and tips to help guide you through the home purchasing process and other mortgage processes like your first mortgage, second mortgage, mortgage renewal, and mortgage refinancing.
With KANETIX, you can now compare rates across Canada! Find the best Canadian mortgage rates in the province of Manitoba, New Brunswick, Ontario, Saskatchewan, Alberta, Nova Scotia, Prince Edward Island, and Newfoundland
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