If you are a first time buyer, you might be asking, what mortgage types are available in Canada? In Canada, there are several types of mortgages available to homebuyers, each with its own features and benefits. Here are some of the most common types of mortgages you’ll find in the Canadian market.
1. Fixed-Rate Mortgage
In a fixed-rate mortgage, the interest rate remains constant for the entire term of the mortgage, which is typically 1 to 10 years. This provides predictability and stability in monthly payments, making it easier for borrowers to budget.
2. Variable Rate Mortgage (VRM)
Also known as an adjustable-rate mortgage, a VRM has an interest rate that fluctuates based on changes in the lender’s prime rate. Monthly payments may vary, and borrowers might benefit from lower rates during periods of declining interest rates.
3. Fixed-Term Variable Rate Mortgage
This type of mortgage combines aspects of both fixed and variable rates. The interest rate is initially fixed for a certain term (e.g., 3 or 5 years) and then becomes variable afterward.
4. Open Mortgage
An open mortgage allows borrowers to make additional payments or pay off the mortgage balance at any time during the term without incurring prepayment penalties. However, open mortgages often have higher interest rates.
5. Closed Mortgage
A closed mortgage has specific terms and conditions regarding prepayments and refinancing. If you wish to make extra payments or pay off the mortgage before the term ends, you might incur prepayment penalties.
6. Convertible Mortgage
A convertible mortgage starts as a variable rate mortgage but can be converted to a fixed-rate mortgage at any time during the term. This offers flexibility if you want to lock in a fixed rate if interest rates start to rise.
7. High-Ratio Mortgage
A high-ratio mortgage is when the down payment is less than 20% of the home’s purchase price. Borrowers are required to obtain mortgage default insurance, which protects the lender in case of default.
8. Conventional Mortgage
A conventional mortgage is when the down payment is 20% or more of the home’s purchase price, and mortgage default insurance is not required.
9. Second Mortgage
Also known as a home equity loan or a home equity line of credit (HELOC), a second mortgage is taken out on a property that already has a primary mortgage. It allows homeowners to access additional funds using their home’s equity as collateral.
10. Cash-Back Mortgage
Some lenders offer cash-back mortgages, where a portion of the mortgage principal is returned to the borrower in cash at the beginning of the mortgage term. This can be used for various purposes, such as covering closing costs.
11. Interest-Only Mortgage
With an interest-only mortgage, borrowers only pay the interest on the loan for a certain period, typically 1 to 10 years. This results in lower monthly payments, but the principal balance remains unchanged.
12. Collateral Mortgage
A collateral mortgage secures the loan against your property, but it can also be for a higher amount than the mortgage itself. This provides flexibility for borrowing additional funds in the future without refinancing.
It’s important to thoroughly research and understand the terms, conditions, and implications of each mortgage type before making a decision. Consulting with a mortgage professional or financial advisor can help you choose the right mortgage for your financial situation and homeownership goals. We will help you find your perfect home and hope that this blog has helped you understand what mortgage types are available in Canada!