Mortgage Types: Understanding Your Most Common Options

If you’ve gone through the mortgage process recently or even decades ago, a mortgage is often one of those “set and forget” things homebuyers only think about at one stage in their journey. Since the last time you looked at them, you may have forgotten the merits of the different types of available mortgages.

While the following doesn’t cover every mortgage, these common options can help you choose the best next mortgage.

Fixed Rate Mortgage

A Fixed Rate Mortgage offers a specific interest rate that is locked in for the mortgage term.

Why you might consider a Fixed Rate Mortgage:

• Your mortgage interest rate won’t change, so there are no surprises over the term of your mortgage

• Your payment amounts will be predictable each month

• You may be protected from swings in the economy and changes in the Prime Rate

Why you might not choose a Fixed Rate Mortgage:

• As a trade-off for the stability they offer, Fixed Rate Mortgages often come with higher interest rates than other mortgages

• If interest rates fall, you’re not in a position to take advantage of the potential interest cost savings

Variable Rate Mortgages

With a Variable Rate Mortgage, the interest rate fluctuates with changes in your lender’s Prime Rate, which is influenced by changes to the Bank of Canada overnight rates.

Why you might consider a Variable Rate Mortgage:

• You’ll be able to take advantage of falling interest rates — if rates go down, you’ll save on interest over the life of your mortgage

• You may pay less interest over time compared to a Fixed Rate Mortgage

• Many Variable Rate Mortgages allow for the option to switch to a Fixed Rate Mortgage during your term

Why a Variable Rate Mortgage might not be for you:

• If interest rates rise, you will pay more interest over the course of your mortgage

• It may take you longer to pay off your mortgage because the amount of principal you pay varies with changes in the interest rate

• Your payments for a Variable Rate Mortgage may change, making budgeting more complex

Conventional Mortgages

A conventional mortgage is a loan of no more than 80 per cent of a home’s purchase price or appraised value — meaning you pay 20 per cent of the price as the down payment. Conventional mortgages are not insured or guaranteed by the government.

Why you might consider a conventional mortgage:

• With a larger down payment, you have more equity in your home right away

• With at least 20 per cent equity in your home, you have access to financial tools such as a Home Equity Line of Credit (HELOC)

• There is no need to pay an insurance premium, lowering your monthly payments

• Conventional mortgages typically come with less paperwork and can be obtained more quickly

Why a conventional mortgage may not be for you:

• It may be difficult to gather the necessary 20 per cent down payment

• The eligibility requirements are more stringent than mortgages backed by a mortgage insurer

High Ratio Mortgages

A High ratio mortgage is one where the mortgage loan exceeds 80 per cent of the property’s value. You must pay a mortgage insurance premium to one of Canada’s three insurers — Canada Mortgage and Housing Corporation (CMHC), Sagen or Canada Guaranty.

Benefits of a High Ratio Mortgage:

• Since they are insured, High Ratio Mortgage rates are often lower than conventional mortgage rates

• High Ratio Mortgages may allow homeowners to enter the real estate market — or upgrade their property — sooner

Other considerations of a High Ratio Mortgage:

• The requirement of insurance means your mortgage payment may be higher — the premium is typically added to your regular payments

• High ratio mortgages are only available for homes up to $1 million in value

Open mortgages

An open mortgage (or open term mortgage) allows you to repay all or part of your mortgage anytime during the term without a prepayment charge.

Why an open term mortgage might be right for you:

• You have the flexibility to pay down the balance of your mortgage at any time without penalty

• You can renegotiate the terms of the mortgage at any time

• It is typically easy to transition to a closed mortgage

Considerations of an open mortgage:

• Interest rates are often higher for open mortgages versus closed mortgages

• Open mortgages are typically for shorter periods of time

• Open mortgages come with variable interest rates, which come with interest rate fluctuations

Closed mortgages

A closed mortgage (or closed term mortgage) cannot be prepaid, renegotiated or refinanced before the end of the term without paying a prepayment charge. It is the most common type of mortgage.

Why you might consider a closed mortgage:

• Closed mortgages offer stable monthly payments that allow you to budget with confidence

• They come with lower interest rates and longer terms than open mortgages

• Some closed mortgages offer certain prepayment privileges, such as lump sum payments, the right to prepay a certain percentage of the original mortgage amount, or the opportunity to double up a payment

Why a closed mortgage might not be a fit for you:

• You will be subject to prepayment penalties should you want to/need to pay off the mortgage before the end of the term

Because different mortgage options are best suited to different lifestyles and financial situations, it’s a good idea to speak with a mortgage professional while you’re considering your next move. They can help you determine the best fit for you and help you weigh these pros and cons for your personal circumstances.

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