For many people, the first time they start learning about mortgages is when it’s time for them to get one. But with so much information and new terminology, it can be overwhelming to take it all in. To help make the process a little easier to navigate, we’re breaking down some major mortgage topics into blog posts for our #MortgageBasics series. This month, we’re discussing what a mortgage is and the different mortgage types available to Canadian buyers.
What is a mortgage?
A mortgage is a type of loan used to buy a home or other property, like a rental property or the purchase of land you intend to build on. Mortgages are loans provided by a mortgage lender, such as a mortgage finance company, bank or credit union. For most people, a mortgage is the largest loan they will ever receive and is paid off over many years, this is known as the amortization period. Because a mortgage is used to buy a property, it is considered a secured loan with the home as collateral.
What types of mortgages are available?
There are many different types of mortgages available for Canadian buyers each with unique features to suit the needs of different borrowers. Here’s a list of the various mortgage types and when they may be used.
Open vs Closed Mortgages
An open mortgage gives homeowners the flexibility to pay off the entire loan at any time. In contrast, with a closed mortgage, you’re only allowed to pay a certain amount of the loan off at a time and will be charged a penalty if you pay the mortgage off before the end of the mortgage term, which refers to the length of time that your mortgage rate is in effect. Due to its flexibility, open mortgages typically have higher interest rates than closed mortgages.
Conventional vs High Ratio Mortgages
When you’re looking to purchase a home, you’ll be required to make an initial lump sum payment towards the purchase which is called a down payment. The minimum down payment required depends on the purchase price of the home you’re looking to buy and ranges from 5 – 20 % of the price the home. If your down payment is 20% of the purchase price or more, your mortgage is considered conventional, or a low ratio mortgage. If your down payment is less than 20%, then you’d qualify for what’s called a high ratio mortgage. The term high ratio mortgage refers to the mortgage amount in comparison to the total purchase price of the home, also known as the loan-to-value ratio. With a high ratio mortgage, lenders require borrowers to have mortgage default insurance.
Fixed Rate vs Variable Rate Mortgages
When it’s time for you to choose a mortgage, you’ll have a choice between a fixed rate mortgage or an adjustable rate mortgage. With a fixed rate mortgage, you’re locking in one rate for the entire term of your mortgage which means your mortgage payments will always be the same. In contrast, if you opt for an adjustable rate mortgage, your mortgage rate and in turn your mortgage payments can change throughout your mortgage term. This is because the adjustable rate mortgage is based on a variable rate, which is dependent on changes to your lender’s prime rate. Typically, adjustable rate mortgages tend to have lower interest rates than fixed rate mortgages, but they also come with some unpredictability.
A convertible mortgage is an option that offers homeowners the most flexibility. It allows you to lock in either a fixed or variable rate when you first get your mortgage and gives you the option to convert your mortgage type at any time without a penalty. Convertible mortgages are generally short-term, six months is the most common, and they give homeowners the ability to lock in a better rate in the future if things change. They are also a good option for those who would like more time to consider their options.
Get Help Finding the Mortgage That’s Right for You
With the various mortgage options available, it can be hard to figure out which option is right for you. Whether you’re getting a mortgage for your first property or researching options for an upcoming renewal, a mortgage broker can help you find the best mortgage for your needs.