Types of Mortgages and Options

Conventional Mortgage

A conventional mortgage is a mortgage that is for no more than 80 per cent (80%) of the appraised value or purchase price of the home. To get a conventional mortgage, you must put a down payment of at least 20 percent (20%) of the purchase price of the home out of your own savings.

High-Ratio Mortgage

A high-ratio mortgage is a mortgage loan for more than 80 per cent (80%) of the price of a home. With a high-ratio mortgage, you can pay as little as five per cent (5%) of the cost of the home as a down payment. If you get a high-ratio mortgage, however, you will also need mortgage loan insurance. Mortgage loan insurance protects the lender if you are unable to pay back the loan, and most Canadian lending institutions are required by law to have it. CMHC Mortgage Loan Insurance and Genworth Canada have helped millions of families buy a home of their own, with as little as five per cent down.

Fixed Rate Mortgage

The standard residential blended mortgage is typically a fixed rate mortgage. A fixed rate mortgage is a mortgage where the interest rate doesn’t change during the life of the mortgage.

Variable Rate Mortgage

A variable rate mortgage is a mortgage where the interest rate changes according to changes in the overall financial market. With a variable rate mortgage, your monthly payments usually stay the same, but the amount that goes to pay either the principal or the interest changes as the interest rate changes.

Most open variable rate mortgages contain a lock-in (convertible option) for conversion to fixed. A capped variable rate mortgage is a variable (floating) rate mortgage in which interest decreases/ increases are capped during the term.

Open Mortgage

An open mortgage is a mortgage that you can repay in part or in full at any time without having to pay an additional penalty cost. Open mortgages generally have a higher interest rate than closed mortgages, but they can make sense if you know that you will be selling your home soon, or if you plan on making extra payments on your mortgage from time to time.

Closed Mortgage

A closed mortgage is a mortgage that does not allow you to make extra payments, or which charges you a penalty if you want to pay off the mortgage ahead of schedule. Closed mortgages offer a lower rate of interest, but they are also less flexible than open mortgages.

Many More Payment Options

Other payment options can be grouped into six categories:

• Amortization - as amortization period decreases, so also does interest cost per payment. Amortization is set at loan origination, but can be reset at renewal.
• Accelerated Payments - allows you to add an additional monthly payment each year by paying bi-weekly as opposed to monthly (i.e., 26 bi-weekly payments versus 12 monthly payments).
• Double Up - an option permitting the doubling of a scheduled principal/ interest payment. A common variation is permitting an increase in monthly payments at specific points in the mortgage term (e.g., each anniversary)
• Frequency - lenders commonly offer monthly, semi-monthly, bi-weekly and weekly payment options. Some allow boroowers to no cost switch between payment frequencies, subject to a minimum notice period.
• Lump Sum - permits prepayment of all or part of the original mortgage amount on sequential anniversary dates. This option is commonly combined with the ability to increase payments.
• Skip Payment - skip one regular monthly payment (or alternatively two bi-weekly or four weekly payments) when the mortgage is not in default. For every double up payment made, a comparable skip payment may be permitted.

Portability

Having a "portability" clause in your mortgage means you can transfer your existing mortgage to a new home. This is advantageous when you have a lower interest rate on your existing mortgage. You can transfer your existing mortgage as a 1st mortgage and get a 2nd mortgage at current market rates for any excess funds needed for your new property. This can help you save money when rates increase.

Assumable

An assumable mortgage allows a buyer to take over (assume) the mortgage balance, subject to lender approval. Taking on an existing mortgage can save you money on the appraisal and legal fees. Plus, depending on whether interest rates are rising or falling, an assumed mortgage could have a lower interest rate than you would get if you negotiated a new mortgage.

Many More Features

Some other commonly found mortgage options include:

• Cash Back - apply to fixed, closed mortgages and typically range from 1.5% to 4% based on mortgage term. Cash is intended for closing costs, but can be used for anything.
• Frequent Flyer/ Incentives - some lenders provide sign-up bonus points and frequent flyer mile accumulation based on interest paid, or similar retail incentives.
• Add-On - permits borrower to increase mortgage principal. The add-on interest rate is blended with the existing rate. Credit approval and property appraisal typically apply.
• Critical Illness Protection - insurance premiums are added to the mortgage payments. The mortgage will be paid off upon verification of specific illnesses. Eligibility requirements vary by insurer. Joint coverage is typically available with protection limited to the loan maximum.
• Mortgage Life Insurance - an insurance policy to pey the mortgage debt upon the mortgage borrower's death. Joint coverage is commonly available. Protection is limited to the mortgage amount.
• Mortgage Disability Insurance - Insurance coverage to pay mortagge payments if the mortgage borrower(s) incurs a disability as set out in the policy.
• Job Loss Insurance - insurance protection for job loss in which the insurance coverage pays mortgage payments for a defined period of time.

Let's think outside the Bank branch. When you meet with a "mortgage specialist" at your local branch you're really just meeting with a Bank employee. They are employees of that Bank and offer mortgages from just that one lender. They can only offer you one brand of products.

Mortgage Brokers are independent. They are not employees of any Bank or Lender. They offer mortgage products from several different Lenders, including chartered Banks. More Lenders competing for your business means a better interest rate and the best mortgage terms.

Mortgage specialists have no formal mortgage educational requirements and are not required to meet any standards for professional licensing to arrange mortgages. Most Banks do provide some in-house training.

Mortgage Brokers must successfully complete provincially regulated Broker courses and continue to maintain their mortgage industry knowledge and be in good standing with the provincial regulator to keep their license. This provides you with more protection knowing a mortgage professional is working in your best interest.

A Mortgage Broker can provide unbiased advice. They work for you, the borrower.

When you receive a mortgage pre-approval from a lender you are basically guaranteed a mortgage by that lender based on the terms of that signed agreement. Having been pre-approved for a mortgage offers you the peace of mind knowing that you can start searching for your next home. Getting pre-approved for a mortgage can help make your search easier, by letting you know in advance exactly how much your lender is willing to loan you to buy a home.