This week we asked Marc Mahoney, Senior Mortgage Specialist at Mortgage Alliance, to respond to our readers’ frequently asked mortgage questions. Interview details are documented below.

1.  Given the current economic climate, do you recommend a fixed or variable mortgage on the purchase of a home?

The question isn’t necessarily which is better:  the question is which is better for you.  Variable rates have historically tended to average out to be a little cheaper, but not in all instances.  Fixed rates help individuals determine their financial obligations into the future, offering an advantage both in terms of budgeting, and peace of mind.  Being within one’s risk tolerance is important.  If going with a variable rate causes you stress with which you’re not comfortable, it isn’t worth it.

Generally speaking, most lenders tend to have very competitive variable rates.  Fixed rates, however, do tend to vary a bit more.  It’s important to do your homework and work with a good mortgage professional to ensure that you’ve got a competitive rate.  Just remember, though — sometimes it’s not simply about the rate, but also about having the product that’s right for you.  And that’s where a good broker can often be most valuable.

2.       What happens to my mortgage payments if I have a variable mortgage and interest rates increase?

Depending on what lender or financial institution holds the mortgage, there are generally two possibilities:  either you make higher payments, or less of your payment goes toward the principal balance of the mortgage.

The answer to this question is often found only in the small print, and has a tendency to be overlooked.  It’s important to keep in mind that home ownership is a great long-term investment for most people principally due to the opportunity to build equity over time.  In a case where the portion of your payment going to the principal balance is reduced, that principal opportunity is negated.

If rates go up, then, it would require extra money on each payment to continue to reduce the principal at the same pace.  Often that can be worth it, especially since that will reduce the future amount of interest payable.

3.       How much downpayment on a house is required to avoid CMHC mortgage insurance?

In almost all cases, 20% down payment will avoid mortgage insurance.  Mortgage Insurance is in place to allow Canadians to purchase real estate with less than 20% down, by helping lenders mitigate their risk.

While avoiding mortgage insurance is often an obvious ambition, it’s important to work out, in terms of cost-benefit, whether it’s worth putting down 20%, or preferable to retain liquid funds.  The answer to that may vary depending on each individual’s circumstances.

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Marc Mahoney, a member of the Canadian Association of Accredited Mortgage Professionals (CAAMP),  is a Senior Mortgage Consultant with Mortgage Alliance – Shoreline Mortgages, Inc. based in St. John’s, Newfoundland & Labrador.   With access to lenders across the country, he has focused on Newfoundland, Ontario, and Nova Scotia.

Winner of Mortgage Alliance’s 2009 Family Care Award, he has developed a focus on helping individuals determine their needs, and working with them to find the best solutions to their financial ambitions.

For inquiries or questions of any type, you can reach Marc by e-mail at mmahoney@mortgagealliance.com, or by telephone at 709-699-5727 or 1-888-747-9696.