What Type of Mortgage Is Right For Me?
Choosing the right type of mortgage when you are buying a property is a crucial step for establishing your budget and a timeline for paying it off. Not sure what type of mortgage is right for you? I’ve prepared a guide to get you started.
Finding the right type of mortgage for you: Mortgages from A – Z
An Adjustable Rate Mortgage is periodically reviewed and then adjusted depending on the current prime rate. The prime rate is the rate a commercial bank’s optimal customers can borrow money, and it affects the monthly payment and interest rate of a loan.
If the interest rate drops when you have an Adjustable Rate Mortgage you’ll have a lower mortgage rate instead of having the same rate for the full term like you would with a Fixed Rate Mortgage. The downside to this, is if the interest rates rise your payments also will. Adjustments can happen as often as 8 times/year. An Adjustable Rate Mortgage is a good option if you want to take advantage of lower interest rates and have enough of a buffer in your budget to withstand any increases that may happen.
An Assumable Mortgage can be assumed by someone else, so long as they are approved by the lender, and the mortgage terms remain the same once transferred.
A Cash Back Mortgage offers you a percentage of the purchase price of a home as upfront cash and can be used for anything other than the down payment on the home. This type of loan has a high interest rate and generally costs twice the value of the cash. It’s usually only used by someone who needs cash right away when they purchase their home.
A Closed Mortgage will have restrictions on paying it off before the term is complete or renegotiating your mortgage. If you want to pay your mortgage off before the end of the term you may have to pay a penalty or you may have a limit on how much you can prepay with penalties if you go over it.
A Collateral Mortgage is a mortgage where you can get more money loaned to you as the property value increases. Click here to learn the truth about collateral mortgages.
A Convertible Mortgage is one you can move from a variable to fixed rate or short to long term without penalty. If you decide to change your mortgage your interest rate will also change to reflect the current rate offered by the mortgage lender for the new term.
A Fixed Rate Mortgage means that you have a fixed interest rate for a set period of time, usually between 1 to 5 years. A Fixed Rate Mortgage makes it easier to manage your budget since your payments won’t change during that term, but a Fixed Rate Mortgage will typically have a higher interest rate. This can still be useful if interest rates are currently low but are expected to rise over the next few years. Fixed Rate Mortgages are a popular option across Canada.
A High-Ratio Mortgage means that you have a down payment of less than 20% (you have a down payment of 5% or more). In this case, you will need to get mortgage insurance and the premium is usually included in the mortgage loan payments.
A Home Equity Line of Credit(HELOC) is often used alongside a mortgage, but can also be used as a mortgage alone for up to 65% of the assessed value of a property. You can borrow money as you need up to that amount but the interest can change at any time because it is tied to the prime rate. This is a flexible option that allows you to pay as much as or want or only make payments on the interest.
A Hybrid Mortgage (50/50 mortgage) lets you get the best of both worlds. It combines a fixed and variable mortgage, where part of the loan is financed at a fixed rate and the other part is a variable rate. The terms for both may be different and it may be trickier to manage when you need to renew your term. You might also face difficulty trying to transfer your mortgage to another lender.
An Open Mortgage lets you make lump sum prepayments or accelerated payments without penalty so you can pay the loan before the amortization period ends. Open mortgages usually have higher interest rates than closed mortgages.
A Portable Mortgage will move when you move. When you sell your old house and buy a new one you can move your mortgage over to that property and you won’t usually have to pay a penalty for breaking a mortgage contract. You also keep your current interest rate, which is useful if your mortgage has a lower interest than what you would currently get.
A Reverse Mortgage is also called a home equity conversion mortgage. It lets you use the equity in your home as cash while still living in the property. This is a good option to supplement your income if you have a lot of equity, are nearing retirement and aren’t planning to move.
A Traditional/Conventional Mortgage means that you have a 20% down payment and the remaining 80% is funded by the mortgage lender. The loan-to-value ratio is low compared to the value of the property.
A Variable Rate Mortgage is another type of mortgage where the interest rate will fluctuate depending on the prime rate. In this case, your monthly payment stays the same and the fluctuating amount is applied to the mortgage principal. This is useful because your budget remains stable and rates are usually lower than a Fixed Rate Mortgage.