About Mortgage Types

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Types of mortgages in Canada

Purchasing a home is one of the biggest financial decisions you will make in your life, so it’s very important to understand your home financing options. Every home buyer is different, but fortunately, there are many different types of mortgages products to suit most situations. Explore your home financing options with confidence! Understand the key choices available to make informed decisions and secure your dream home.

Closed Mortgages

This type of prepayment feature actually only applies to the sale of the property. Under all other circumstances, you have no right to prepay the entire principal owed, although there are typically other repayment options such as increasing their periodic payment or making lump sum payments. However, the main characteristic of this feature is that it does not allow for full prepayment at any time during the term of the mortgage except by sale of the property. This must normally be considered an arm’s length sale, as well, meaning that you couldn’t “sell” the property to a family member simply to prepay the mortgage

Fully Open Mortgages

A fully open mortgage allows the you to repay the mortgage, in whole or in part, at any time without penalty or notice. This option is particularly beneficial to those who know that they may be coming into a cash windfall, such as from an inheritance or property sale.

Partially Open

A partially open mortgage allows the borrower to repay the mortgage in whole with a penalty of either 3 months’ worth of interest or the interest rate differential

What is a high-ratio mortgage?

A high-ratio mortgage refers to a mortgage in which the borrower has a down payment between 5% – 20%. These mortgages require mortgage default insurance.

CMHC, Genworth Financial Canada, Canada Guaranty

The Canadian government supports high levels of homeownership through an insurance plan that covers lenders in the event that borrowers of insured mortgages default on their mortgage.

Types of mortgage interest rates

Fixed Rate Mortgages

A fixed interest rate does not fluctuate during the mortgage term. This option allows your payment to remain constant so you know exactly how much you will pay every month and the amount you will have paid off at the end of the term.

Variable Rate Mortgages

A variable interest rate will fluctuate with prime rate throughout the mortgage term. This impacts the amount of principal that you pay off each month as your mortgage payment will remain constant.

What determines variable interest rates

Variable interest rates are generally expressed in relation to a bank’s prime rate, which is set by the bank from time to time. A bank’s prime interest rate may change at any time.

What is a Basis Point?

Changes to a bank’s prime rate are sometimes described in terms of increases or decreases in basis points. A basis point is a unit of measure that represents 1/100th of one percent (0.01%). For example, if interest rates are increased by 50 basis points, it means they were increased by 0.5%. The term basis point value simply denotes the change in the interest rate in relation to a basis point change.

Selecting the Right Mortgage

The right mortgage for you isn’t necessarily the one that offers the lowest rate, but rather a complete package of terms, conditions, rates and fees that fit your specific short- and long-term financial goals. A Mortgage Planner will strive to understand your needs and explore options that are relevant to you.

Conventional vs. High-Ratio Mortgages

A conventional mortgage equals no more than 80% of the appraised value or purchase price of the property, whichever is less. A high-ratio mortgage is usually for more than 80% of the appraised value or purchase price.

Closed vs. Open Mortgages

Closed mortgages generally offer lower interest rates than open mortgages of the same term, but open mortgages let you pay off as much as you want, any time, without penalty – which could save you a bundle in the long run.

Short Term vs. Long Term

The term you select is important. Short term mortgages are appropriate if you believe interest rates will be lower at renewal time. Long term mortgages are suitable if you feel current rates are reasonable and you want the security of budgeting for the future. This can be especially important for first time homebuyers.

Fixed Rate vs. Variable Rate

Identifying whether a fixed or variable rate mortgage is best for you is an important decision. The truth is that no one can accurately forecast what the future holds in the financial markets 2 to 5 years from now. So assessing whether a fixed or variable rate mortgage product is best for you requires an understanding of your personal financial plan and ability to handle market fluctuations.