Understanding the Mortgage Options for Your New Home

understanding mortgage options

You have finally reached the point where you are ready to buy a new home.  Or, maybe you are going to sell the one you own, so you can downsize and use the capital you have invested into the little home of your dreams.

In any event unless you are able to pay cash for your new home buy you are going to have to negotiate a mortgage.   It is amazing at how little comparative shopping is done for such a huge investment.  Yes, you may have spent weeks beating the pavement looking at a ton of potential homes that you wanted to buy.  How many hours did you spend looking for the mortgage to finance it?   Possibly you just went to the bank that you deal with for your checking and savings account and put it in their hands.

Even if you do this you will be given some mortgage choices most likely.  These will be the choice of fixed, open or variable.


Your lending institution may call this a floating rate mortgage.  This is because the interest rate can change throughout the course of its term.  The rate is based on what the Bank of Canada Prime rate does.  So if this Bank of Canada interest rate rises, then so will the mortgage rate on your house, and likewise it will go down.   Many banks will offer a slightly better rate than what the prime is.

If you are opting for this mortgage you are taking a little bit of a risk concerning your mortgage rate.

Fixed Rate:

Don’t think that the rate for this mortgage is dependent on the Bank of Canada’s prime interest rate.   It is set by the chartered banks.   This is why you may see a fixed rate being offered by the Bank this week, and it could change quickly in the next few weeks.   However, once you lock your mortgage in at a fixed rate it stays at that for the term of the mortgage.

Open Mortgage:

This mortgage is the type you can pay off at any time you like without having to pay a penalty.   The downfall is the interest rates will be a little higher.   It will be prime plus whatever extra that particular lender wants.

Closed Mortgage:

In this case you are agreeing to a specific length that the mortgage will last and if you wanted to pay this mortgage out before its dues date you would have to pay a hefty penalty.   Usually the interest rate for this type of mortgage is a little more lucrative, which is the enticement for choosing it.

So with so many choices which one do you choose?   You almost have to be able to read the future to know which is going to offer you the best advantages.  You need to list all of the benefits and the rules that come with them.   For example, any potential penalties for paying them out, or do they allow you pay extra on the principal.   They all come with advantages and disadvantages.  You need to then go through the list and see which type of mortgage holds the most advantages with the least amount of disadvantages based on your personal future projections. Include mortgage shopping as part of your financial planning efforts.


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Sam Seidman, CPA, CA, LPA
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Toronto, Ontario
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Telephone: (416) 398-1700
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