5.2.10 Video: Mortgage basics

Introduction

Whether you're buying your first home or your 5th home, the process of finding a new place and making it your own is an exciting one. For many people, a mortgage is necessary to make your housewarming possible.

To show you some mortgage basics, we're going to follow Kemal and Andrea on their first home-buying experience.

Segment 2: Concepts

Kemal and Andrea have found a home they love.

Now they need a mortgage to close the deal.

A mortgage is a loan that allows the lender to take possession of the mortgage property if you don't repay the loan on time.

They've saved up some money for a Down Payment.

The down payment is the money that you pay up front toward the price when you buy your home.

The amount of their loan is the loan principal.

They'll have to make regular payments to repay the principal, plus interest.

Once Andrea and Kemal start paying off their mortgage, they will have some equity in the house.

The equity is the difference between the value of the property and the amount they still owe.

(Voiceover)

Kemal and Andrea will have to choose an amortization period for the mortgage. This is the period of time it will take to pay off the mortgage in full. The amortization period is often 20 to 25 years.

Kemal and Andrea will also have to decide on a term for their mortgage. Not to be confused with the amortization period, the mortgage term is the time that the mortgage agreement will be in effect. Often the term is a 1 to 5 year period and the mortgage is renewed at the end of the period at the interest rate then in effect.

There are two types of mortgages.

An open mortgage is one that you can prepay at anytime during the term, without a charge.

A closed mortgage is one that you cannot prepay or change without charge before the end of the term.

(Voiceover)

For interest payments, there are options for as well.

A fixed interest mortgage has an interest rate that does not change during the term.

A variable interest mortgage has an interest rate that can change during the term and could have :

1. Variable payments – payments that may change as interest rates change,
2. Fixed payments – that do not change even if the interest rate changes, though more payments may be needed if the interest rate goes up. Another option is,
3. A convertible payment plan, which is a mortgage with variable payments that you can change to fixed payments.

Kemal and Andrea: That's a lot to think about. How do we sort it out?

Nico: Now that Andrea and Kemal are familiar with the basic mortgage concepts, they'll have to determine how much they can afford to borrow…

Segment 3: Plan an affordable mortgage

The best way to start is by looking closely at your family budget.

(Voiceover)

Look at your take-home income, which is your income after taxes, and your monthly expenses. Work out what you can realistically afford to spend on housing and allow for extras:

Don't forget to include the expenses of buying and moving into a new home, maintaining the home and if you have a mortgage with variable payments, leaving some extra room in case interest rates rise.

Try using the FCAC home buying budget worksheet to work out those costs.

Segment 4: Calculator

Another great tool you can use is the Mortgage Calculator Tool. You can find it at the Financial Consumer Agency of Canada website. Use it to calculate what the payments would be with different options.

Conclusion

Knowing the basic language and concepts when you negotiate your mortgage will help you confidently choose the options that work the best for you. And making the right choice could save you thousands of dollars.