What to Know About Different Mortgage Types

Posted by Justin Havre on Friday, June 30th, 2017 at 8:18am.

Getting a Mortgage LoanWhen applying for a mortgage, you might be surprised by the amount of options you have available. From a capped rate mortgage to a high ratio mortgage, buyers need to understand what these loans could mean for their finances. This guide identifies the most common types of mortgages, how they differ from each other, as well as other terms buyers should know.

1. Open vs. Closed Mortgages

The way that you pay your mortgage will depend heavily on whether or not the loan is open or closed. A closed mortgage often carries a lower interest rate, but it places several restrictions. With a closed loan, you may be limited to making the specified payments. If you attempt to refinance the mortgage or pay off the remainder before the end of the term, you can expect prepayment penalties in a closed mortgage. In exchange for a higher average interest rate, an open mortgage allows you to make extra payments or pay off the balance without fines. An open mortgage may be more appropriate if you expect to have extra money to devote to the mortgage.

2. Conventional vs. High Ratio Mortgages

The standard for a down payment on a mortgage is at least 20 percent. If you can make this kind of down payment to buy a home, you are typically eligible to apply for a conventional mortgage. However, a lot of prospective borrowers cannot gather the funds to make a large down payment. Buyers who make a smaller down payment must pay to insure their mortgage with an organization providing mortgage insurance, such as the Canada Mortgage and Housing Corporation. If you make a lower down payment and have accumulated 20 percent in equity by the end of the first term, you may not have to pay for insurance afterward.

3. Capped Rate vs. Variable Rate Mortgages

There are also different ways to consider the interest rate during the period of the term. Buyers could have a mortgage with a capped rate or a variable rate. Capped rate mortgages have one interest rate for the full term of the loan, although that interest rate may be slightly higher. Variable rate mortgages may have a fixed payment or an adjustable payment. If you choose a fixed payment, you will have the same payment every month. If your interest rate changes, you may put more or less of the money toward the principal of the loan. With an adjustable payment on a variable rate mortgage, your payment could rise or fall depending on the change in interest rate. In this type of loan, the amount going to principal remains the same.

4. Mortgage Terms and Amortization

With every loan, buyers should consider the difference between the loan term and the amortization. A standard loan term may range from 6 months to 10 years, after which you must renew the loan with your lender or refinance the loan with a new lender. You may have new requirements for the loan on the new term. Amortization refers to the amount of time you have until the mortgage is fully paid. For a new mortgage, amortization can range from 25-35 years, with a 25-year limit for any mortgage insured by CMHC.

Getting a mortgage – whether it's for a listing in Bow Meadows or a vacation home on the other end of the country – requires a lot of research, particularly as it relates to the type of mortgage that works best for you. With this information, you can understand the terms that a lender presents, and make the choice that is most appropriate to your financial situation.

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