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Your mortgage will be a combination of different options, depending on your situation and choice.
We summarized mortgage types so you can learn about them before you approach lenders.
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| Down Payment vs. Lender's Risk |
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Conventional Mortgage - The lower your down payment the greater risk your lender will have to take.
A down payment of 20% or more of the purchase price will qualify you for this type of mortgage. That means you won't have to buy mortgage insurance protecting the lender against your default.
High Ratio Mortgage - If you save less than 20% but not less than 5% of the purchase price you can only get a high ratio mortgage which must be insured.
Mortgage insurance enables home buying for those who did not save at least 1/5 of the price but have enough income to afford higher mortgage payments and cover insurance cost.
High ratio insured mortgages made own homes a reality for many Canadians, with as little as 5% put towards the purchase of a house.
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| Closed vs. Open |
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Closed Mortgage can't be paid off without a penalty before the mortgage term expires, but many lenders allow extra annual payments of 10% - 20% of the
outstanding balance. Closed mortgages have lower interest rates than open mortgages.
Open Mortgage is more flexible since it can be paid off faster, without a fine. Despite a higher rate additional payments can save you thousands of dollars in interest charges. It's a good choice if you plan to sell your house or anticipate an extra income in the near future.
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| Fixed vs. Variable |
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Fixed Rate Mortgage has a specific, steady interest rate for the entire term.
This mortgage is usually open for a short term and closed for a long term. Fixed rates are the lowest for a 6 month term, and they grow along with the term length. Borrowers who want a long term protection against rising interest rates may choose a fixed rate option up to five years.
Variable Rate Mortgage is closed and its
interest follows prime rate
fluctuations throughout the term. Variable interest rates are usually much lower than fixed rates for a long period of time, such as a five year term. See an
example of how fixed rates grow over time, and how they compare to variable rates at some point in time :
| Lenders | Variable
Rates |
Fixed Rates
| 6
months | 1
year | 2
years | 3
years | 4
years | 5
years
| | Bank 1 | 6.5 | 7.5 | 7.9 | 8.1 | 8.3 | 8.4 | 8.5
| | Bank 2 | 6.45 | 7.45 | 7.5 | 7.75 | 8.0 | 8.3 | 8.6
| | Bank 3 | 6.75 | 7.5 | 7.45 | 7.7 | 7.9 | 8.25 | 8.45
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If rates drop you will pay off your mortgage faster due to a lower cost. On the other hand,
interest hikes will result in a longer amortization and your cost will increase.
Variable rate mortgages provide some security and flexibility in a long term. Five year term (or longer) mortgages usually can be switched from closed to open after
three years, and loans for at least three years can be locked into fixed rates at any time without a penalty.
Convertible Mortgage might be a solution for those who hesitate what to choose.
Borrowers who want to keep their options open for some time can choose this type of a short term (six months or one year) fixed rate closed mortgage. They will
have a flexibility to lock in their rates for a longer term (three years or longer) when the initial short term expires.
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| Short Term vs. Long Term |
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Short Term Mortgage has a term shorter than three years. Long Term Mortgage is for a three to ten year term. A short term financing may cost less in interest but lacks the security of a long term option.
When deciding what financing to choose carefully analyze your risk tolerance. If you are confident that interest rates won't be rising and can afford higher
borrowing cost in case they do, a short term option may be right for you. Otherwise, you may rather consider a long term solution and consider an extra cost as the price for buying a peace of mind.
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| Other Options |
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Portable Mortgage can be moved to a new house. This feature usually applies to fixed rate closed mortgages. You can transfer your rate, balance
and maturity date without
pre-payment charges. If extra funds are required they can be borrowed at current rates.
When the debt on the new house is smaller you may pay a penalty on the amount of the reduction.
Assumable Mortgage allows a qualified buyer to take over the seller's mortgage, and a good rate can be a great incentive in a poor market. On the other hand, the seller may be financially liable when the new owner defaults on payments. If you can't be released by your lender from such an obligation let the buyer get own loan.
Second Mortgage (also known as an equity loan) is another mortgage on the same property. It is often taken by owners who already accumulated some equity in their homes and can use it as a collateral to borrow extra funds. These mortgages have higher interest rates because they are more risky to lenders.
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