Mortgage Information
Understanding Mortgages
Navigating the Canadian mortgage landscape involves crucial decisions that impact a homeowner's financial journey. Hopefully this gives some guidance on these decisions.
Mortgage Types
In Canada, mortgages are primarily divided into two types: fixed-rate and adjustable-rate. A fixed-rate mortgage maintains a constant interest rate throughout the mortgage term, while an adjustable-rate mortgage allows for fluctuation in the interest rate during the term.
Mortgage Terms
The typical Canadian mortgage has a lifetime (amortization) of 25-30 years, often divided into shorter terms. The common choice is a 5-year term, resulting in multiple renewals until the mortgage is fully paid. This setup allows borrowers to negotiate rates at the initial purchase and explore better options during renewal periods.
Fixed & Variable Rates Make Up
Fixed-rate mortgages offer stable monthly payments with a locked-in interest rate for the chosen term. In contrast, adjustable-rate mortgages tie to the bank prime rate, with the borrower's rate expressed as a discount off this benchmark. Variable rates, influenced by changes in the Bank of Canada's key interest rate, introduce potential fluctuations in the mortgage interest rate. Understanding these nuances is crucial for informed decision-making in the Canadian housing market.
Understanding Mortgage Options
As you look into mortgage rates, you might observe variations between quoted rates and advertised rates. We hope to minimize the discrepancy and help you understand the options you have. Here are the 9 different types of mortgages a person can get in Canada.
Fixed Rate Mortgage
Offers a stable interest rate for the entire mortgage term, providing predictable monthly payments and financial security.
Variable Rate Mortgage
Involves an interest rate that can change based on fluctuations in the prime lending rate, potentially leading to varying monthly payments.
Open Mortgage
Allows for prepayment of the mortgage without penalties, offering flexibility but often with a higher interest rate.
Closed Mortgage
Limits prepayment without penalties, providing a lower interest rate in exchange for reduced flexibility.
Convertible Mortgage
Permits conversion from a variable to a fixed rate (or vice versa) during the mortgage term, accommodating changing financial needs.
High-Ratio Mortgage (Insured Mortgage)
Requires mortgage default insurance for down payments less than 20%, enabling homebuyers with smaller down payments to enter the market.
Conventional Mortgage (Uninsured Mortgage)
Requires a down payment of at least 20%, and has no Canada Mortgage and Housing Corporation (CMHC) insurance attached to the mortgage.
Collateral Mortgage
Registers the mortgage for an amount exceeding the loan, allowing for future borrowing flexibility, but may involve higher fees.
Home Equity Line of Credit (HELOC)
Utilizes home equity as collateral for a line of credit, enabling borrowers to access funds as needed, with variable interest rates.
Understanding Insured vs. Uninsured Rates
In Canada, the payment of mortgage insurance premiums can be determined by the down payment made on a property. When the down payment is 20% or more, the lender usually covers the insurance premium. However, if the down payment is less than 20%, the borrower is responsible for paying the insurance premium, and it is added to the loan amount, amortized throughout the mortgage's life.
Transactionally Insured Mortgages
A mortgage with a down payment of less than 20% is termed "High Ratio Insured" or "Transactionally Insured." This category consistently offers the best advertised rates. If the down payment is greater than 20%, the expected rate may not match the advertised rate. If the lender pays the insurance premium, the mortgage retains its insured status, allowing for eligibility for the high ratio rate upon renewal with the same lender. However, switching lenders may result in the loss of insurance. In contrast, a Transactionally Insured mortgage remains eligible for the insured rate regardless of the lender, as the borrower always pays the insurance premium. Refinancing, however, causes a mortgage to become uninsurable. The Insured column is separately highlighted in rate advertisements to emphasize that the insured rate applies when the borrower's down payment is less than 20% on a purchase or if they switch lenders but their mortgage was transactionally insured.
Uninsured Mortgages
A mortgage is uninsured if it falls under any of the following categories: 1. The property value is greater than $1,000,000 2. The amortization is greater than 25 years 3. The mortgage is a refinance. These mortgages carry a higher risk since they cannot be insured. As such, they carry higher rates than insured mortgages, and do not have tiered LTV pricing.