b-LOG: Mortgages 101. A Pocket Guide to the Types of Mortgages in Canada
Mortgages. There likely exists no other subject that causes more angst among those looking to purchase real estate. And it is for this reason we nominate mortgages for top honours in our home buying heebie-jeebies awards.
Unless you are fortunate enough to be financially privileged, getting a mortgage is a must in order to purchase real estate.
In simple terms, a mortgage is fundamentally a loan that is secured against your home. But that’s where the simplicity ends. Jammed with jargon and fraught with fiscal pitfalls, the mortgage world is in no small terms, a daunting place.
As seasoned REALTORS®, we understand there is no substitute for being educated and prepared. So, let’s get started digging into mortgage loan lingo with the aim of giving you increased home buying confidence.
While there are many more types of mortgages in Canada than those listed here, we focused on the types you will most commonly hear about or come across in your real estate buying voyage.
Conventional/Low Ratio Mortgages
These types of mortgages require no mortgage protection insurance and see down payments equal to 20% or more of the property’s value or purchase price.
High Ratio Mortgages
The reverse of Conventional/Low Ratio Mortgages, these types of mortgages must have mortgage default insurance because borrowers are contributing less than 20% of the value/purchase price of the property. The three mortgage insurance companies in Canada include Canada Mortgage and Housing Corporation (CMHC), Genworth Financial and Canada Guaranty. This default insurance protects the lender in case the borrower isn’t able to repay the loan.
An Open Mortgage allows you the flexibility to repay the mortgage at any time without penalty. Open mortgages typically have shorter terms but can include some variable rate/longer terms as well. Rates tend to be higher on Open Mortgages compared to Closed Mortgages with similar terms.
Cannot be prepaid, renegotiated or refinanced before maturity, except according to its terms.
Fixed Rate Mortgages
The interest rate is determined and fixed during the term of a Fixed Rate Mortgage. Different prepayment options are often offered by lenders for rapid repayment of the mortgage and for partial or full repayment.
Variable Rate Mortgage (VRM/Adjustable Rate Mortgages (ARM)
These differ from Fixed Rate Mortgages in that the rate may be changed during the term of the mortgage. Lenders review these types of mortgages at specified intervals or if the market interest rate has changed. During this review, they may alter the size of the payment, the length of the amortization period or a combination of both.
Home Equity Lines of Credit (HELOC)
A revolving line of credit secured by your home. HELOC’s allow you to 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.
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