A mortgage is the amount of money you pay in increments towards your home, so you are able to slowly pay off the property. There isn’t just one mortgage that homeowners have to choose from. You have a wide array of choices that will make the process easier for you based off of your income stream. Any mortgage has an insurance in place to protect the lender from lost funds. Every mortgage is in a term. This is the period of which you will pay that type of mortgage. Which is between 1-5 years. After the term has ended you have to renegotiate for another mortgage during the renewal period.
Traditional mortgage is the initial process that let people comfortably pay off their homes. Just because it worked for others decades ago may not mean it is beneficial to you. You have an initial 5-20% down payment, while the remaining funds are slowly paid out over the course of years. If the property is a $1 million or more, it must be 20% due to the risk the lender would be taking on. Also note that if your mortgage is less than 20%, you have to pay an insurance premium to the Canadian Mortgage and Housing Corporation (CMHC).
Fixed rate mortgages is when the interest rate on the payments are set for the duration of the loan, as opposed to traditional which can change depending on the Bank of Canada’s decision for the rate. The rates are generally higher than traditional. This is for buyers who prefer more stability with their purchase, as they can also have a set sum to put towards it. Rates generally fluctuate, although not drastically, but it can be a headache if money is tight. The five year fixed rate is the most common mortgage in Canada.
High ratio mortgage is when the down payment is less than 20%, while the payment rate is higher than the typical fixed rate. This will ultimately pay off the mortgage off faster than traditional mortgage. A borrower is required to have a mortgage insurance with this type. Mortgage insurance reimburses lenders or investors if the buyer is unable to fulfill their obligation. This rate is typically chosen if the buyer wants to keep additional funds liquid when closing costs are distributed or emergency funds are required.
Adjustable rate mortgage is when the monthly rate and the interest rate can change. The Bank of Canada determines the prime rate, which determines the interest rate, altering the monthly payment. If the rate increases, this could negatively affect you, but if it decreases it could benefit you. This is a risk/reward type of payment. The fluctuations can happen a number of times every year. This is only recommended if you can financially withstand the potential for increases.
Variable rate mortgage is similar to adjustable rate, as the interest may change, but the monthly payments stay the same. This is also influenced by the prime rate. This is a more secure version of adjustable, there is some risk involved, but the payment is always set. Rates are generally lower with this rate, as fluctuations can negatively affect you.
Convertible mortgage is when you move from a variable rate to a fixed one. You can switch it the other way around but there is generally a penalty. When you move it, the rates increase to whatever the lender decides on, beginning a new term. If you expect rates to rise on a variable rate, this is a good option if you cannot handle the increase.
Hybrid mortgage is a blend of fixed and variable mortgages. Part of the loan is prorated at a fixed rate, while the other is doled out at a variable rate. This has the potential to be more difficult to manage, harder to renew and to transfer to a different lender. This is generally a more stable way of payment and gives you more security if rates do increase.
Closed mortgages have a specified limit of the percent you have to pay off each year. Payments over or below the determined rate can incur large penalties. It is difficult to renegotiate the rate until the term is complete. If you wish to alter it, you generally have to pay a fee if the lender does not approve it. It is one of the more restrictive mortgages.
Open mortgage is when you have set payments, but you are able to make additional payments without penalty. Most mortgages in Canada are open. They generally have higher interest rates than closed. This is the most flexible mortgage, it works alongside the comfort level of the buyer.
Portable mortgage is when you move your remaining mortgage to another property. Generally, no penalties are incurred for altering your mortgage. This requires a bridge loan, which is lent by the bank when moving funds from one property to the next. In order to move your mortgage to the next home (if it is possible), there must be a clause in it or you incur a fee. This type of mortgage can only be utilized when you sell your initial property. This gives you the option of starting a new mortgage, which could be beneficial if the interest rate is lower, but this may also incur additional fees.
Collateral mortgage is when the lender can provide more money to the owner as the value of the property increases, without having to refinance the mortgage. This is beneficial if you think you’ll need an additional loan. If you’ve fallen behind on payments, the bank can raise the interest rate as high as 10%. The lender cannot transfer the remaining funds to another party.
Vendor take back mortgage is when the seller of the property provides a loan of a portion of the price to the buyer. The seller still has equity in the property, while still owning a percentage equal to that of the loan, until the entirety is paid off.