Michelle Kam on How to Determine Which Mortgage is Right for You

Buying a home for the first time is an extremely exciting process. But beyond the excitement of house shopping, you’ll also need to consider the financial aspects of home buying, like choosing a mortgage. Mortgages and purchasing a home go hand in hand for most Canadians. That is why it’s important to do your research into mortgages in advance and figure out what kind is right for you.

Michelle Kam is a real estate broker in Toronto, Ontario. She has worked for numerous highly acclaimed real estate firms and even founded her own brokerage firm. She provides her expertise on mortgages, helping you determine which one is right for you. 

Open Versus Closed Mortgages

Two of the most common types of mortgages are open and closed mortgages. Knowing the difference is key, says Michelle Kam. First, a closed mortgage works as follows: the buyer must stick to their loan agreements throughout the term of the contract. No alterations can be made during your term; you can only request a change after your term is finished. Generally, the rates are lower in a closed mortgage because the lenders know they can depend on you to pay your mortgage due to the strict nature of the deal. However, the disadvantage is there is very little flexibility. 

Alternatively, Michelle Kam asserts that an open mortgage is one that is extremely flexible, allowing the buyer to pay off as much of their mortgage as they want, whenever they want, so long as it meets the minimum monthly payment specified in the loan agreement. The main drawback with an open mortgage is that the interest rates are usually much higher, which for many people, is not worth the increased flexibility. However, if you’re hesitant to enter into a multi-year closed mortgage agreement, Kam recommends starting with a shorter one, such as a six-month closed agreement, if the option is available, allowing you to get a feel for it and even request a modification to the agreement after the six months are up. This way, you can keep the low-interest rates while also getting a bit more flexibility once the six months have ended. 

Finally, there is one other type of mortgage, known as a convertible mortgage, which is essentially a hybrid between an open and a closed mortgage. A convertible mortgage starts out as a short-term closed mortgage, but then gives you the option of converting it to a longer term at any point after the initial term has ended, providing greater flexibility. 

Variable Versus Fixed Rate Mortgages

When it comes to Toronto real estate, there are two other considerations you must take into account when choosing a mortgage. You’ll need to decide whether a variable or a fixed rate mortgage is right for you, asserts Toronto mortgage broker Michelle Kam. These features of a mortgage are more to do with your interest rate, rather than your loan payments (the focus of open and closed mortgages). For those that don’t know, a fixed rate mortgage is one where you will pay the agreed upon interest rate, negotiated at the start of your mortgage term, throughout the entirety of your mortgage agreement. This makes the whole process a lot more predictable, as you won’t have to worry about your interest rate increasing. That said, fixed rate mortgages are often more expensive as you are in part, paying for the reliability and peace of mind that comes with not being at the whims of the economy. Alternatively, a variable mortgage is one where the interest rate changes based on the prime rate. This unpredictability can be a good thing, and usually is, as it results in you paying less than you would for a fixed-rate mortgage. However, the downside is that your interest rate has the possibility of going way up if the economy experiences a downturn. Overall, Michelle Kam says that you will need to assess your risk tolerance when deciding whether a variable or fixed-rate mortgage is right for you.