Variable-rate or fixed rate? Is the loan open or closed? Term of 25 or 30 years? Can I expedite my refund? Should I insure my loan? If you are at the stage of buying your first house or your first condo, you indeed have a lot of questions. Here are some explanations that can guide you in your choices.
Is the loan open or closed?
The secured loan is the one for which people opt most often since its interest rate is lower than that of the available loan. It offers you the possibility of making early repayments up to certain thresholds. Thus, you can accelerate the repayment of the capital up to 15% of the initial amount of your loan per year without compensation. You can also double the number of your regular payments.
The available loan imposes no limit on prepayments but generally has higher interest rates than the secured loan. It is only used in particular situations. For example, some people planning to move on a potentially short-horizon favor this formula not to have to pay compensation when the loan is closed.
Repay quickly or save?
In a low-interest-rate environment, maximizing your Registered Retirement Savings Plan (RRSP), Tax-Free Savings Account (TFSA), and Registered Income Plan contributions may be wise. Education Savings (RESP) without trying to repay your loan quickly.
If these contributions are optimal, you could then favor an accelerated reimbursement. If you are carrying debts at higher interest rates, for example, on a credit card, prioritize these repayments!
Your advisor will be able to guide you according to your situation!
“It is recommended that you do not spend more than 40% of your gross household income on repaying your financial commitments and debts, including your mortgage payment and other housing expenses (property taxes, school taxes, energy costs, etc.),” argues Patrick Champagne, home financing product manager at Desjardins.
Fixed or variable rate?
The fixed-rate applies for the entire term of the loan, regardless of fluctuations in the economy.
The variable rate is based on the prime rate, which can vary according to market fluctuations.
What about payments?
Contrary to popular belief, no matter what type of rate you choose (fixed or variable), your loan repayments will usually be a fixed amount. The difference is:
- With a fixed rate, you know in advance the amounts to be paid during your periodic payments until the end of the term. You, therefore, avoid potential surprises linked to fluctuations.
- For the variable rate, the portion of the payment that applies to the decrease in your principal varies according to the fluctuation of the lender’s prime rate. The amount of payments on the loan remains, as a rule, always the same. Exceptionally, if there is a sharp increase in the variable rate and the price is no longer sufficient to pay the interest, then the payment amount will have to be adjusted.
“Historically, in the long term, the variable rate has proven to be more advantageous in terms of interest cost than the fixed-rate,” illustrates Patrick Champagne.
Compare our mortgage rates at a glance – This link will open a new window.
Which amortization period to choose?
The shorter your amortization period (e.g., 20, 25, 30 years), the faster you can pay off your loan. But the longer this period, the less your regular payments will be! In addition, you will pay less interest by accelerating your expenses, for example, by opting for accelerated weekly or bi-weekly repayments rather than monthly.
Beyond your purchasing power, it is essential to determine the mortgage repayment terms properly. At this stage, your Desjardins advisor will review your entire file. It will paint a contemporary and future portrait of your needs and financial capacity, considering your lifestyle.
Keep some leeway in your budget to deal with unforeseen events and upcoming rate increases!
Ensure your peace of mind
Loan insurance: This link will open in a new window.1 includes two types of protection:
- Life protection will pay off the insured balance of your loan in the event of your death.
- Disability protection will cover, according to the percentage chosen, your mortgage payments in the event of a claim.
For salaried or self-employed workers, it complements group and personal insurance, which may not be sufficient to meet all your needs. Thus, by subscribing to Loan Insurance, you are making a wise choice by protecting your financing, then you will sleep soundly. The cost of loan insurance varies, among other things, depending on the coverage chosen, the duration, and the loan amount. You could choose to insure between 10% and 100% of your loan balance and payments.
Ensure you’re appropriately protecting your home and financing and being prepared for any financial contingencies homeowners may face.
What is the difference with mortgage default insurance?
Mortgage loan insurance refers to the insurance you will need to purchase from Canada Mortgage and Housing Corporation (CMHC) or Sagen (formerly Genworth Financial Canada) if the down payment on your property is less than 20% of the total amount of its sale price. You can pay for this insurance in one payment or integrate it into your mortgage payments, except for the cost of taxes on the premium, which must be paid separately. This insurance protects your lender if you cannot make your payments.
When should I contact my advisor?
If you plan to buy a property within the next 12 months, now is an excellent time to contact your Desjardins mortgage advisor or representative.
You will benefit from personalized service: your advisor will assess your borrowing capacity and present your options in terms of loans, terms, rates, frequency, and amortization.