The first step towards finding the mortgage that works best for you is understanding what a mortgage payment is comprised of because the fact is – you aren’t just paying for your physical home. Let’s use the acronym PITI (Payment, Interest, Taxes, Insurance) to break down your payment and understand why each part is important.
Principal: The amount borrowed to buy your home
The principal is the amount of money you borrowed to pay for your home. It makes up the majority of your loan.
If you choose the typical loan repayment term (in Canada) of 25 years, your first-year payments will contribute more to the interest than your principal. However, not to worry – with each month that passes your principal payments will increase until they become the biggest part of your overall mortgage payments.
Interest: What you pay to borrow money
Interest is what you pay your lender in exchange for the loan you secure. There are many external factors that can affect your loan interest rate including:
- your credit score,
- the location of your home,
- the price of your home and the amount of your loan,
- the size of your down payment,
- the length of your loan term,
- the type of interest rate (fixed and adjustable),
- and the type of mortgage solution you choose.
In short, your interest rate depends on the level of risk you have as a borrower.
At Interior Savings, we’re proud to offer some of the most competitive mortgages rates around. Book an appointment with one of our Mortgage Specialists, use our mortgage calculators to calculate your payment, or apply online today to take advantage of our amazing rates!
Taxes: What the government charges for owning property
The amount you pay in property tax is dependent on the assessed value of your property, not the market value. In Canada, your property is taxed on a federal, provincial, and even municipal level. This means that if you bought the exact same home in Kamloops and Kelowna, the amount of property tax you would pay for each could differ despite both being located in British Columbia.
While, the taxes you pay on your home are not directly included in your monthly mortgage payment, you will need to budget an amount for them each month, or plan to pay the full amount in July. Some members find it helpful to set up an automatic withdrawal to set aside the money each month for the property taxes. One of our helpful Member Service Advisors can help set this up for you.
Insurance: What you pay to secure the loan
In Canada, every mortgage that is purchased with less than a 20% down payment is required to have mortgage insurance (also known as Mortgage Default Insurance). Mortgage insurance provides the lender with the flexibility to offer you the same competitive interest rates available to homebuyers with a larger down payment. It’s insurance, which guarantees the mortgage by protecting the lender should the homeowner be unable to continue their payments for some unforeseen reason.
The cost of this insurance is usually rolled into your monthly mortgage payment so there are no added premiums to pay. Interior Savings also provides special rates for first time home buyers that have insured mortgages. Contact our one of our Mobile Mortgage Specialists to find out more!
Keep in mind that homeowner’s insurance is completely separate from mortgage insurance. You pay homeowner’s insurance to cover the replacement cost of your home in case it gets damaged by fire or other serious accidents.
To make sure you’re not missing any important information in your journey to becoming a home owner, download our comprehensive First-Time Home Buyers’ checklist. It’ll prepare you for the unexpected costs of home ownership, show you new ways to save for your down payment, and much more.