Mortgages

Having a mortgage also builds your credit history. This is probably the biggest way you'll build your credit history. Once you have this, you'll be getting credit card and personal lines of credit offers from everyone.

Normally, you'll need 35% downpayment when you apply for a mortgage especially if you're a new immigrant. If you have a good credit history, you can go as low as 5% down. But any amount lower than 20% will require that you get private mortgage insurance in the event you are not able to pay your mortgage. This means additional cost to you but is a good idea if you're not able to put in 20%.

There are basically two types of mortgages, open mortgage and closed mortgage. An open mortgage is usually more expensive because you can pay off the balance anytime you want without penalty. Lenders usually do not like open mortgages because they make less money on these if you pay it off early.

Closed mortgages usually offer a lower interest rate because this is what lenders like best as this earns them more money. The reverse of an open mortgage, you cannot pay off the balance of the mortgage without paying a penalty.

There are several kinds of interest rate options: variable rate, fixed rate or mixed.

A variable rate mortgage means the interest rate you are charged can change anytime since it is a floating rate and it depends on the current prevailing prime rate set by the Bank of Canada. You do pay a lower interest rate because you are taking this risk. Variable rate mortgages are great when there is a downward trend in the interest rates.

You pay a higher interest rate for a fixed rate mortgage but your rates are locked-in for a certain number of years. They can be 1, 3, 5 or more years depending on the lender. The longer the time period the higher the rate. This type of mortgage is best in a rising interest rate market.

A mixed mortgage is part variable and part fixed. The mix is determined by the lender and it is best to get information from your lender about this type of mortgage to see if this is a good option for you.

You can get several terms on your mortgage. It's usually 5, 10, 15, 20 or 25 years. There are other mortgage terms but these varies from lender to lender. The shorter the period the lower the rate.

One of the things to remember when you're buying a house is not to buy more than you can afford just because the monthly payments seem to be affordable. Most real estate agents will gear you to buy a more expensive home but using a longer mortgage term or fancy calculations to show you that you can easily afford it. Remember, the higher the selling price the more the real estate agents gets paid.

Find a house where you'll be comfortable with the payments. Remember, if your monthly payments are based on a low interest rate. When you renew your mortgage in a few year when interest rates go up, your monthly payments could increase by at least $200 a month and that would really eat up your budget.

I'll discuss more about mortgage and how to pay them off earlier in my future columns.