Different Types of Mortgages
There are many different types of mortgages available, so before you choose, here’s some information you will want to know.
Conventional vs. High Ratio Mortgage
Conventional / Low Ratio Mortgages
A mortgage where the down payment is equal to 20% or more of the property’s value/purchase price. A low-ratio mortgage does not normally require mortgage protection insurance.
High Ratio Mortgages
A High-Ratio Mortgage is one where the borrower is contributing less than 20% of the value/purchase price of the property as the down payment. These types of mortgages must be have mortgage protection insurance through Canada Mortgage and Housing Corporation (CMHC), Genworth Financial or Canada Guarantee; the three mortgage insurance companies in Canada.
An open mortgage allows you the flexibility to repay the mortgage at any time without penalty. Open mortgages usually have shorter terms, but can include some variable rate/longer terms as well. Mortgage rates on Open Mortgages are typically higher than on Closed Mortgages with similar terms.
A closed mortgage is a mortgage agreement that cannot be prepaid, renegotiated or refinanced before maturity, except according to its terms.
Fixed Rate Mortgages
The interest rate of a fixed rate mortgage is determined and locked in for the term of the mortgage. Lenders often offer different prepayment options allowing for quicker repayment of the mortgage and for partial or full repayment of the mortgage.
Variable Rate Mortgages (VRM) / Adjustable Rate Mortgages (ARM)
These types of loans differ from a fixed rate mortgage in that the mortgage rate may be changed during the term of the mortgage. Generally, these mortgages are initially set up like a standard loan, based on the current interest rate. The mortgage is reviewed at specified intervals and if the market interest rate has changed, either changing the size of the payment or the length of the amortization period (or a combination of both), the lender then alters the mortgage repayment plan.
Home equity lines of credit (HELOC)
A home equity line of credit is a revolving line of credit secured by your home. You can borrow money up to the credit limit, which is usually a percentage of your home’s value.
A HELOC is an option for borrowing on your home’s equity, which is the difference between the value of your home and the unpaid balance of any current mortgage.
It is also possible to get a HELOC instead of a traditional mortgage. These products may be split into portions that you repay in different ways. For example, a HELOC may have a portion with a fixed interest rate and another portion with a variable interest rate.
- Registered with a collateral charge: After a HELOC is set up, you do not need your lender’s approval to borrow funds up to the credit limit, subject to the terms of the HELOC agreement.
- Additional funds can be advanced: You can borrow money up to the credit limit on the HELOC, which is usually a percentage of your home’s appraised value. After you make repayments, the funds become available for you to borrow again.
- Variable interest rate: The interest rate for a HELOC is usually variable, so your payments may increase if rates rise.
- Interest-only payment option: You may have the option to just pay the interest due on a HELOC instead of a set payment amount. However, be aware that making interest-only minimum payments will increase the overall cost of your loan and the time you need to repay it since you are not paying off the principal.
It can be very easy to borrow more money than you can comfortably afford to repay with a HELOC. Make sure you will be able to handle repayments if interest rates and your payments increase in the future.
- Ability to make prepayments: You can generally prepay any amount whenever you want on the HELOC portion without the need to pay a prepayment charge. Note that prepayment charges may apply to any other portions that have a closed term.