Mortgages

Buying a new home is an exciting time in anyone’s life but, before getting caught up in choosing the perfect home, or remodeling to make the perfect home, one extremely important issue must be considered – the mortgage.  A mortgage is a loan that is secured against the home that is purchased. Because real estate values regularly drop, the banks are happy to lend you money using the home you purchase as security. If the home owner fails to adhere to the terms of the mortgage agreement, the bank is within its rights to repossess the home and sell it in hopes of obtaining the remainder of the lent money.
There’s more to a mortgage then simply getting approved. Your mortgage will likely be the largest loan you’ll ever receive, and deciding which type of mortgage you’ll receive is not a decision to be taken lightly. Before selecting a type of mortgage, there are several things to consider.

Mortgage Terms and Amortization Period

The mortgage term is the time period in which you must repay your loan. These terms can range anywhere from months to years. Interest rates and mortgage terms are strongly linked. In general, the longer the term, the higher the interest rate. Once you reach the end of the term, your options are to either repay the remainder of the loan or to negotiate a new mortgage.

Amortization Period

The amortization period is a reflection of how long it will take for the mortgage to be paid off as well as the costs incurred by the new homeowner. Mortgages with longer amortization periods tend to cost more and take a longer time to repay. The advantage to these longer amortization periods is that monthly, or biweekly, payments are smaller. One important thing to consider is that these longer amortization periods are more affected by changes in interest rates. Small changes in interest rates are amplified and can significantly change how much your mortgage will cost you.

Short amortization periods cost less and are paid off much sooner. They are also affected by changes in interest rates but to a lesser extent. The trade-off is that your monthly, or biweekly, payment is larger.

Amortization and mortgage terms are the two main factors in determining how long it will take you to pay off your mortgage and how much your mortgage will cost.

Choosing Your Mortgage

There are two types of mortgage options available to you – variable and fixed mortgages. When analyzing the factors that influence mortgage rates, it’s important to consider what causes the fluctuations in Canadian government bond yields.

Variable Mortgages

Variable mortgage rates are those which fluctuate with changes to interest rates during the course of the mortgage term. The interest rates of a variable mortgage are generally lower than those of fixed rate mortgages but signing up for a variable mortgage is always a gamble.

When selecting a variable mortgage, you are hoping that your variable mortgage rate will be lower over the term of your mortgage than the mortgage rate that you could have been locked into at the beginning of your mortgage term with a fixed mortgage. While a variable mortgage can be more lucrative, it requires more diligent monitoring of Ottawa real estate market trends in order to determine whether this type of mortgage is the best one for you.

What Causes Rate Changes?

Variable mortgage rates are primarily determined by the bank’s prime rates. The shift in prime rates is caused by changes in the Bank of Canada’s key interest rate.  A drop in the Bank of Canada’s prime rate almost always results in an equal drop in variable mortgage rates. Often, the Bank of Canada will increase the prime interest rate when it wants to lower inflation.

Fixed Mortgages

A fixed mortgage has an interest rate that remains constant throughout the mortgage term. The interest rate is determined by the fixed mortgage rates at the beginning of the term. The benefit of a fixed mortgage is that once you are locked into this fixed rate, you never have to worry about the state of the mortgage rate market or about the rate of your own mortgage.

Fixed rates are mainly determined by the yield on state bonds of equal maturity, and the Canadian fixed mortgage is directly influenced by the yield on government issued bonds of equal maturity.

Role of the Stock Market

The condition of the stock market plays a large role in determining the price of government bonds. The rise in stock market prices means that people are more likely to make money off of the stock market than off government bonds. This means that fewer people will want to buy bonds, causing a decrease in the price of bonds and an increase in the bond yield. This results in a rise in the fixed rate.

A drop in the stock market provides the opposite result. As the stock market falls, fewer people invest in stocks and opt instead to invest in safe equities like government bonds. When there is an increase in government bond purchases, their price rises to reflect this demand. The bond yield decreases, which results in a decrease in the fixed rate.