The majority of Canadian home-buyers will choose to finance their homes with a lender. Doing so will allow them to pay the cost of their property in installments. When it comes to financing, Canadians have various different mortgage options available to them in their new home purchase. In this blog, we will outline these mortgage programs so that you can see which existing option will fit best with your needs once you decide to become a homeowner.
When you put a down payment that is 20% or more of the total cost of the house then you are eligible for a conventional mortgage which is a type of homebuyer’s loan that is not secured by a government entity, but rather available through a private lender.
When your down payment is less than 20%, then you will be subject to the high-ratio mortgage which includes purchasing mortgage insurance to cover the higher risk of your loan.
Offering maximum flexibility, the open mortgage allows borrowers to make accelerated payments without a penalty in order to pay off the loan before the term is complete. However, this type of mortgage is usually accompanied with a slightly higher interest rate.
With closed mortgages, there are restrictions when it comes to making accelerated payments before the specified loan term is complete. A buyer will likely have to pay the lender a penalty if they decide to pay the loan in full before the end of the closed term. However, most lenders will allow borrowers with closed mortgages to make a lump sum payment of up to 10, 15 or 20% of the original mortgage amount once a year without penalty.
With a fixed-rate mortgage, the rate and payment you make each month will stay constant until the term of your loan is complete (usually 1 to 5 years). The interest rates for fixed-rate mortgages are usually slightly higher however, the borrower can rest assured that their monthly payments will remain stable. In fact, the five-year fixed rate mortgage is the most popular mortgage option in Canada.
With a variable-rate mortgage, the rate and payment you make each month will fluctuate based on the market interest rate or « prime rate ». This means that when interest rates drop, more of your monthly payments will go towards paying off the principal as opposed to paying off the interest. On the other hand, when interest rates rise, you will pay more on interest and less on your total principal.
If you decide to go with a convertible-rate mortgage then you will be able to move from a variable to a fixed rate, or change from a short-term to a long-term mortgage, at anytime without a penalty. This is a great option if you want to start-out with a variable rate when interest rates are low, but later move to a fixed-rate when you expect rates to rise.
A capped-rate mortgage is when your lender offers you a variable rate mortgage that will fluctuate with the prime rate but it will not rise above the cap that they have placed. However, these mortgages will likely penalize you if you decide to make accelerated payments on your mortgage.
A hybrid mortgage allows you to use more than one type of mortgage in a single mortgage registration. This means that you could choose a fixed rate portion and a variable rate portion, or a line of credit portion. A hybrid mortgage is also known as a 50/50 mortgage since it allows you to get the best of both worlds.
With an assumable mortgage, a mortgage can be transferred to the buyer from the current owner. When a buyer assumes a mortgage, he of she will continue to make the same monthly payments at the same interest rate as the previous owner for the remaining term of the mortgage. Once the term is completed, the buyer will need to qualify for a new mortgage. This is particularly popular when mortgage rates start to rise.
As you can see, there are various mortgage options that the Canadian home-buyer can choose from, some of which can even be combined to provide more flexibility. To decide which of these mortgage options is best suited for you, it is always advisable to meet with a mortgage professional who will be able to evaluate your situation and give you the best mortgage product available.