Understanding Mortgages: An Overview

As a first-time home buyer, you’ll want to learn as much as you can about mortgages—what they are, how they work and how they can benefit you. While you may be consulting a mortgage specialist during the home-buying process, the more knowledgeable you can become about mortgages, the more likely you’ll be able to articulate what you need—and want—in a mortgage.

Here’s a short primer on mortgages and key mortgage terms to help get you started.

What is a mortgage?

A mortgage is a loan given by a bank or mortgage lender to help you buy a home. It can allow you to get into a home sooner than if you had to save up for the whole purchase price. The house acts as collateral for the money you borrow under the mortgage loan.

How a mortgage works when buying a home

• The buyer uses funds from a mortgage loan to pay the seller for the property and the buyer repays any money borrowed, plus applicable interest and fees, over a set period of time (e.g., typically, 5, 10, 15, 20, 25 or 30 years).
• The buyer repays the lender at set intervals (typically, every month or biweekly). A portion of the payment is used to pay down the amount borrowed (i.e., the principal) and a portion of the payment is applied to interest.
• The mortgage is registered on the property with the applicable provincial or territorial land registry office.
• In many cases, the buyer can move into the new home as soon as the closing is complete (although the terms of the sale/purchase agreement can sometimes specify a later move-in date).

Choosing the right mortgage

Choosing a mortgage is one of the biggest decisions you’ll make. Consult a mortgage specialist for overall guidance and support.

Some things you’ll want to consider:

• Type of mortgage: Fixed-rate or variable-rate; open or closed.
• Mortgage term: The length of time a mortgage rate and other conditions set out by the lender are in effect. Typically, mortgage terms lengths range from six month term up to 10 years.
• Amortization period: The total length of time it will take you to pay off your mortgage; typically people choose 25 or 30 years amortization periods.

A longer amortization period usually means lower monthly mortgage payments. However, it can also mean you’ll pay more interest overall because you’re taking longer to pay back the mortgage principal to the lender.

Consider the following when selecting your mortgage payment options:

Home ownership and building equity in your first home

Building equity is an important part of owning a home and having a mortgage. Equity is the difference between your property’s value and the amount you owe on your mortgage. There are extra things you can do to build equity:

• Make extra payments whenever possible to help reduce your mortgage principal (but be aware of prepayment penalties or fees).
• Make home/property improvements to increase the value.

Frequency of mortgage payments

You will also have the flexibility to choose the frequency of your mortgage payments. While monthly payments remain the typical choice of many home buyers, there are a number of other options available, including: semi-monthly, bi-weekly, accelerated bi-weekly, weekly and accelerated weekly. Keep in mind that the more often you make payments toward your principal, the more you will save on interest over the life of the mortgage.

When you select an accelerated weekly or bi-weekly payment option, you are essentially making the equivalent of one additional monthly payment each year which will help pay down your mortgage faster.

A great tip to make paying your mortgage a bit easier: Schedule your payments to coincide with when you get paid.

Speak with a mortgage specialist to discuss all the mortgage options available to you.

This article offers general information and should not be regarded as a complete analysis of the subject matter discussed. It is not intended as legal, financial or other professional advice. Consult appropriate professional advisors regarding your specific situation.

Personal lending products and residential mortgages are offered by Royal Bank of Canada and are subject to its standard lending criteria. Conditions apply.