Open, closed, fixed, variable – check your mortgage options
Buying a home comes with tonnes of questions. And, “What kind of mortgage is the best?” is one of the biggest and most common.
In Canada, the options are plentiful – in fact, almost too plentiful. To help make sense of them all, here’s a list of the most conventional types of mortgages and how they differ from one another.
Traditional or conventional mortgages: these require a 20 percent down payment, and the remaining 80 percent comes from the lender. They are also considered a low loan-to-value ratio, meaning the loan amount is low relative to the property’s value.
High-ratio mortgages: with this mortgage, the borrower has a down payment of less than 20 percent, and the law requires mortgage default insurance. The premiums for that insurance are often rolled into the mortgage loan payments. High-ratio mortgages used to be thought of as undesirable, but with today’s low interest rates and higher housing prices, this is almost becoming the norm.
Fixed-rate mortgages: this mortgage features a “locked-in” interest rate that doesn’t change through the chosen length of the term (typically running between 3 and 10 years). Your payments stay the same throughout the entire time, so it’s easy to budget. And to pay for that stability, the rates for fixed mortgages tend to be slightly higher than other types of mortgages. This can be very beneficial though when rates are low and expected to rise over the term.
Variable-rate mortgage: this type of mortgage sees the loan’s interest rate fluctuate based on the current prime rate. Your monthly payment stays the same, but the amount of payment applied to the mortgage principal changes. If interest rates fall, you benefit; if they rise, not so much. Typically, these mortgages have lower rates than the fixed-rate ones.
Adjustable-rate mortgage: this mortgage is intermittently reviewed and then adjusted depending on what’s happening with the prime rate. This adjustment affects monthly payments and the loan’s interest rate. If you can handle changing payments when these intermittent changes occur, they usually have lower rates of interest.
Convertible mortgage: this mortgage can change from variable to fixed or from short to long term, without penalty at any time. Good for when you expect things to rise but still want to take advantage of a lower rate for a while . . . just make sure not to forget about it if things start going up!
Hybrid (or 50/50) mortgage: a combo of fixed and variable rate mortgages, with both parts being financed at different rates. This offers good stability but can sometimes be hard to transfer or renew and is not offered by all lenders.
Closed mortgages: these mortgages have restrictions about being paid off or renegotiated before the term of the loan is complete. Penalties can occur if they are paid off too early or if they have a prepayment limit that is exceeded.
Open mortgages: flexibility is offered by these loans in that lump sum or accelerated payments can occur without penalty. This means the loan can be paid off before the end of the amortization period. This also means a slightly higher interest rate than those of closed mortgages.
Portable mortgage: moves if you do, essentially. Your current mortgage is applied to another property and without paying penalties. The interest rate stays the same, and you don’t need to do the whole approval process again. Handy if you are planning on moving but still need to renew in the meantime.
Assumable mortgage: someone else can take it over upon approval from the current lender; mortgage terms need to stay the same.
Home Equity Line of Credit (HELOC): not a mortgage per se, but used in conjunction with one for up to 65 percent of a property’s assessed value. The line of credit’s interest rate is linked to the prime rate and therefore is variable. But you can pay any amount at any time or just cover the interest of the loan.
Collateral mortgage: the lender can give you money as the property’s value increases without the need to refinance. But, it’s not transferrable at the end of term, and overdue payments can get dinged with a rise in the rate.
Of course, all these mortgages are available with different term lengths and mortgage payment schedules, which all come into play as well.
Whatever your situation, there is an option that will work for you – you just need to find it. So, keep doing your research and talk to banks and brokers to get their input before you make any decisions.
As always, please feel free to get in touch if you want to discuss real estate related topics and considerations. Don’t forget to visit my Facebook page or website to keep up to date on the latest Comox Valley listings.
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