What Are the Different Types of Mortgages Available to Canadians?
Qualifying for a mortgage can be stressful. But once you do, you have to decide what kind of mortgage you want. And there are a lot of different types of mortgages. It’s important to keep in mind that there is no one-size-fits-all approach to mortgages. There are mortgages designed to meet everyone’s personal and financial needs. Below are explanations on the different types of mortgages available to Canadians, what makes them unique, and why they might be right for you.
A fixed-rate mortgage is one where the interest rate is “fixed” meaning, it doesn’t change during the mortgage term. In Canada, the average mortgage term is five years, but it can be longer or shorter.
Homebuyers will often opt for a fixed-rate mortgage if they think interest rates are going to increase. Locking in at a fixed rate means your payments won’t change.
There is a trade off with a fixed-rate mortgage; the interest rates are generally a little higher than other types of mortgages. But you also get stability, knowing how much you pay each month, and how much goes to the principle and is going to interest.
A five-year fixed rate mortgage is the most popular mortgage in Canada.
With a variable-rate mortgage, the interest rate fluctuates based on the bank’s current prime rate. Some people chose a variable-rate mortgage because interest rates are low and they do not expect those rates to rise during the mortgage term. Like a fixed-rate mortgage, your monthly mortgage payments are the same, but the amount that goes toward the principle and interest will change depending on what the prime rate is.
If interest rates fall, more of your mortgage payments goes toward the total principle and less goes toward interest. But if rates rise, less of your payment goes to paying off the mortgage and more goes into the banks.
Because of the higher risk associated with a variable-rate mortgage, the rates associated with this type of mortgage are generally lower than they would be with a fixed-rate mortgage.
If you have a down payment that is less than 20% of the value of the home, the mortgage is considered high ratio. Because the loan-to-value ratio is over 80%, you are required, by law, to get mortgage default insurance. The fee for the insurance is included in the monthly mortgage payments. Just because you’re paying for “default insurance” doesn’t mean it’s there to help you. It protects the lender in case you default on the mortgage.
Sometimes, it makes more sense to get a high-ratio mortgage with mortgage default insurance than wait until you can save up a 20% down payment. Even those who have a 20% down payment will sometimes get a high-ratio mortgage, holding back some of the down payment to help with closing costs, an emergency fund, or to set up their new home.
An open mortgage is a flexible mortgage that allows you make lump sum payments, or extra payments—including paying off the mortgage in its entirety—without having to pay a penalty.
An open mortgage often has a term of less than a year and tends to come with a slightly higher interest rate than a closed mortgage.
A closed mortgage comes with restrictions or penalties for paying off the balance or renegotiating before the mortgage term ends. Because they are not as flexible as an open mortgage, the interest rates are lower than an open mortgage. At the same time, because the rates are lower there are more restrictions.
With most closed mortgages you can still make extra payments, refinance, or break the mortgage before the end of the term, but you just have to pay a big penalty.
Home Equity Line of Credit
A home equity line of credit, or HELOC, is a revolving line of credit that allows you to tap into the equity you’ve built up in your home. You build up equity every time you make a mortgage payment, or the value of the property increases.
To qualify for a HELOC you have to have built up at least 20% equity in the property. You also need to have good credit. If you do qualify, you can access up to 65% of the value of the property.
With a HELOC, the full sum is deposited into an account. You can take out as much or as little as you want and use it whenever you want on whatever you want. There are no fixed prepayment amounts and you only pay interest on the money you use.
A cash-back mortgage provides you with a percentage of the home’s property value up front, in cash. This money can be used for anything (moving expenses, furniture, the dentist, a vacation, etc.) except the down payment.
Because the interest rate is higher on a cash-back mortgage it is best suited for those who need an influx of cash after they purchase the home.
A conventional (or traditional) mortgage is one that requires you to have a 20% down payment. The remaining 80% of the cost of the house is provided by the lender. Depending on where you get your mortgage, whether from one of the big banks or a private lender, you may have to get insurance as well.
Conventional mortgages and other financial products provided by traditional lenders come with a lot of hurdles, including a mortgage stress test. If you don’t pass the stress test, you don’t get the mortgage. If your credit isn’t good enough for the big banks, your mortgage application will get rejected.
There are other options. Instead of using a traditional lender like the big banks or a trust company, you might want to consider using a private mortgage lender. Because traditional lenders are not federally regulated, they do not need to adhere to the same prohibitive rules.
Canadalend.com, Helping You Get the Best Mortgage
If you’re looking for a mortgage, contact the licensed mortgage professionals at Canadalend.com. They will ensure you understand all your options and help you find a mortgage that best suits your lifestyle and financial needs.
How does Canadalend.com do it? The mortgage experts at Canadalend.com are independent, they have access to hundreds of different lenders. This means they have your best interest at heart.
Some of the lenders Canadalend.com works with specialize in helping those who are self-employed, have unreliable income, are new to Canada, or have failed the mortgage stress test, secure a mortgage.