Understanding Types of Mortgages in Canada

Use our guide to learn about the different type of mortgages and find your family’s best fit

Choosing the right mortgage is just as important as choosing the right home. Finding a mortgage that complements your financial situation and future goals is the best possible housewarming gift you can give yourself. Outlined below are the most common types of loans, followed by the two types of mortgage rates. Note that not every type of loan is open to both types of rates, and not every lender provides every type of loan. Learn about the different options below, and  check with your mortgage provider to see what is the best option for you.

What is the difference between an open vs closed mortgage?

Closed mortgage

Closed mortgage interest rates are usually better than those in other types of mortgages, but you’re committed to the terms of your mortgage for a period of time. If you want to refinance, renegotiate or increase your payments, you’re likely to be hit with a penalty. However, you may have the option of making lump-sum payments up to a certain amount throughout the year penalty-free, depending on your agreement with your lender. Such payments go directly to the principal, lowering the amount you’re paying interest on.

Open Mortgage

An open mortgage typically has a higher interest rate than a closed mortgage, but this is offset by the ability to make additional payments without penalty, including paying the loan off in full. This type of mortgage is beneficial if you plan on increasing your payments in the future.

What is a convertible mortgage?

Convertible Mortgages

A convertible mortgage starts off with a variable interest rate, often as a 6-month convertible mortgage, that can be fixed at a later date. This type of mortgage is handy when you want to take advantage of lower initial rates you think will rise in the future. The mortgage terms will let you know when you’re eligible to convert your loan—convert your loan within the time period specified or you’ll miss your opportunity to do so. Keep in mind, you’ll likely have to pay fees to convert.

How does a reverse mortgage work?

Reverse Mortgages

A reverse mortgage is an option for property owners 55 or older, regardless of their income, enabling them to turn a portion of their home equity into cash. Rather than the homeowner paying a monthly fee to the lender, the lender pays a monthly fee to the homeowner. Principal and interest payments aren’t required as long as the property is kept in good standing with all taxes and insurance payments maintained. Of course, this isn’t free money—the funds received must be paid back to the lender when the home is sold or vacated.

How does a cashback mortgage work?

When you need a little more money to pay for closing costs, renovations or other life events, a cashback mortgage might be tempting. These types of mortgages have a ‘cash back at closing’ stipulation which means, when your mortgage closes, you’ll receive a cash infusion. This type of mortgage comes with a higher fixed interest rate and penalties for ending the term early.

What is the difference between a home equity line of credit and a traditional mortgage?

A home equity line of credit (HELOC) enables you to borrow 65% of your home’s appraised value up front. Like a credit card, the HELOC accrues interest only on the money you use and requires a minimum payment each month to remain in good standing. If you need more than the 65%, you can combine the HELOC with a mortgage to raise your borrowing capacity to 80% of the home’s appraised value.

How do variable and fixed mortgage rates compare?

Loans are always paired with at least one of two types of mortgage rates—fixed or variable. The terms of your mortgage will dictate what your options are during the life of your loan.

A fixed rate means the amount of interest you pay isn’t going to change, so you’ll always know what to expect. If interest rates go up, you won’t spend a single cent more, but if they go down, you won’t get a share of the good fortune.

A variable rate, also called an adjustable rate, will change depending on the lender and the credit markets. By accepting more of the risk than you would with a fixed rate, you stand to benefit when interest rates are good, but lose when they’re not. Special fees or penalties may apply to prepayments, and your terms may specify a cap on how often and how much the interest rate can change.

Different lenders provide different loan terms and mortgage rates, so it’s important to do your homework before selecting what you think will work best for you. Investigate your finances and do the math using the Government of Canada’s Mortgage Calculator and the current rates—will you have enough money coming in to make your monthly payments? Do you prefer safety or flexibility? Above all, ask questions and make sure you fully understand the terms of any agreement before you sign. Your future self will be glad you took the time!

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