Mortgages 101
6 Common Mortgage Terms Explained
When it comes to mortgages there’s a lot to take in, and some of the terminology can be confusing. Here are 6 common mortgage terms you’ll need to know when making decisions about your mortgage.
Fixed Rate
The interest rate stays the same for the length of the mortgage term (3 years, 5 years, etc.).
Variable Rate
The interest rate fluctuates based on changes to Sudbury Credit Union’s Variable Rate Mortgage (VRM) Base rate.
Conventional
The mortgage is no more than 80% of the property value. Your down payment will need to be 20% or more of the purchase price.
High Ratio
The mortgage is more than 80% of the property value. Your down payment can be less than 20% of the purchase price however, mortgage insurance is a requirement.
Open
The mortgage can be paid off at any time without penalty. Open mortgages typically have higher interest rates compared to closed mortgages.
Closed
The mortgage cannot be paid off early without facing a penalty, however closed mortgages typically offer a lower rate.
You may be wondering whether to choose a fixed rate mortgage or a variable rate. There are a lot of opinions about which is better, but ultimately, the decision is unique to your financial situation and risk tolerance. We’ve broken down the difference between the two and provided some important things to consider to help you decide which is right for you.
Fixed Interest Rate
A fixed interest rate stays the same for the length of the mortgage term (3 years, 5 years, etc.). Your payment will be set and will remain unchanged for the term, and you’ll know exactly how much will be remaining on your mortgage at the end of the term. Fixed rates are usually higher than a variable rate for the same term length but the trade off is the security and stability of a set rate and a set mortgage payment.
Variable Interest Rate
A variable interest rate may increase or decrease throughout the mortgage term. Your mortgage payments may remain the same for the length of the term however, if your interest rate increases, more of the payment amount will go towards interest and less will go towards the principal. It’s possible that the rate may increase enough that none of your payment goes towards paying down the principal. In this case, you’ll want to discuss increasing your payment amount with your advisor or consider moving to a fixed rate mortgage if the terms of your variable rate mortgage allow it. If the interest rate decreases, then more of your payment will go towards the principal which would mean you’ll pay down more of your mortgage balance and save on interest. Though a variable rate is normally lower than a fixed rate for the same term, there is more potential risk associated with a variable rate.
Which one is right for you?
To help you decide between a fixed rate or variable rate mortgage, consider the following questions:
Are you comfortable with some risk in exchange for potential savings?
Does your budget allow for a potential increase in your mortgage payment or do you require a stable payment amount?
Let’s breakdown the key differences between fixed rate and variable rate mortgages:
| Fixed Rate Mortgage | Variable Rate Mortgage | |
| If Rates Increase: | Your rate does not change. | Your rate increases and you'll pay more interest. |
| If Rates Decrease: | Your rate does not change. | Your rate decreases and you'll pay less interest. |
| Monthly Payments: | Your payment amount stays the same for the term length. | Your payment may increase if rates increase. |
| Risk Level: | Low risk. You know exactly what you'll pay. | Higher risk. You could end up paying more. |
| Consider this mortgage if: | You want stability and budgeting certainty. | You are comfortable with some risk in exchange for potential savings. |
Have more questions or still unsure? Your Member Advisor can help - contact an advisor today.
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