What’s the best mortgage for first-time home buyers?

Fixed vs variable rate: Which mortgage is best? 

One of the major distinctions between types of mortgages is fixed-rate versus variable-rate. Both have pros and cons, so which one is the best mortgage for first-time home buyers? 

A fixed-rate mortgage is just like it sounds: The rate and monthly payments will stay the same for the whole mortgage term (more on mortgage terms below). With fixed rates, you don’t have to worry about market fluctuations, but you might end up paying more over time if variable rates become cheaper.

In contrast, variable-rate mortgages fluctuate with the market, because they are tied to your lender’s prime rate. The prime rate is basically the “standard” lending rate that your lender offers. currently 6.45% That means that if the prime rate goes up or down, so will your mortgage rate and your monthly payments.

A variable-rate mortgage is a good choice if you have more of an appetite for risk, or if you have an idea of where the market is headed. As fixed rates continue to climb in 2022, variable rates have become relatively lower and thus more attractive.

Choosing the right mortgage term 

Know that you can select various terms for your mortgage, with the most popular one in Canada being a five-year term. The mortgage term is the period of time that you commit to staying with your mortgage lender, along with all of the associated terms and conditions attached to the loan you take out. 

At the end of the term, you have to renew your mortgage on the remaining principal with the new rate and potentially new terms and conditions. A longer term can help you lock in a good interest rate and favourable terms for a longer period of time, while a shorter term can give you more flexibility but offers less protection if interest rates rise in the near future. 

That said, the rates for short-term mortgages have historically proven to be lower than those for long-term mortgages. The length of the mortgage term you choose depends on your appetite for risk and how long you intend to remain in your new home. 

Know how long it will take to pay off your mortgage  

Your mortgage term is not your amortization period. The amortization period is the total length of time that it takes you to pay off your mortgage. 

Major lenders in Canada typically will offer amortization periods of five to 25 years, with the maximum being 30 years when you have a down payment of at least 20%. The shorter your amortization period, the higher your regularly-scheduled mortgage payments will be, but the trade-off is that you’ll end up paying less in interest fees over time.

Should I go with the maximum I can afford?

As a first-time home buyer, it’s also important to think about the size of the mortgage you can realistically afford. When searching for your home, despite the size of the loan you can afford at the time, there are some real-world considerations to keep in mind. 

Foremost among these is the fact that the Bank of Canada is almost certain to raise interest rates in 2022, perhaps even as early as April, which will mean that variable rates will climb. Fixed rates, which have been on an upward trend, will also likely continue to rise. 

Even without the rising rates, you’ll also want to keep in mind saving for retirement—many experts recommend you put aside at least 10% of your gross salary towards that goal (and some even recommend as much 30%). Borrowing the maximum amount you can theoretically afford today could lead to financial difficulty down the road. 

If you have any doubt about what you can afford, it may help to use a mortgage affordability calculator. These calculators are designed to give you an estimate, so it’s always good to confirm the results with a broker who understands the complexity of your financial situation. 

Should I choose flexibility or predictability? 

Ultimately, these options—fixed versus variable rate, term, amortization period and the total size of your mortgage—all boil down to whether you prefer flexibility or predictability, and what your appetite for risk is. 

Be realistic when thinking about what you can afford and what you will be comfortable with. And, luckily, when searching for the best mortgage for first-time home buyers, you don’t have to do it all alone. When you’re ready to start looking, a mortgage broker can answer any questions you might have and use their access to multiple lenders and mortgage rates to find the best deal for you as a first-time buyer. 

James Laird is a co-founder of Ratehub and the president of CanWise Financial. MoneySense and CanWise Financial are affiliated through their parent company, Ratehub Inc.

Have a question for James Laird? Email [email protected].

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