Choosing between the different types of mortgages is not that hard if you know the jargon – here is a guide of credit options widely used in Canada.
If you are taking out a loan for the first time, it can be easy to get confused – there are many options. Here in the article, you’ll find a list of the types of mortgages available in Canada.
Types of mortgages
Conventional mortgage
This option is considered the best option for individuals with good credit and can make an initial payment of at least 20% of the acquisition cost. Under current regulations, only 80% of the cost of the property purchased can be borrowed.
It is also important to know that if you want to take out a conventional mortgage, you cannot borrow money from a financial institution or person for an initial contribution.
Advantages
- The moment you buy your house and make the first deposit, you build equity in it. You can use that equity for a variety of purposes, such as applying for a HELOC
- No need to make payments for CMHC insurance
Disadvantages
- The borrowing rate might be higher than in high-ratio credits
Jumbo Mortgage
Loans of this type are usually taken out when the total price of the property to be purchased exceeds the federally approved maximum limits of the credit. Some moneylenders in Canada count more than $600,000 as jumbo loans, while others consider mortgages of more than $1 million to be jumbo loans. This is not the norm in Canada, unlike in the U.S., where jumbo mortgages are usually taken out with high interest rates. On the contrary, there is a good chance that you can get a jumbo mortgage in Canada with a low borrowing rate. However, applications for jumbo mortgages are usually scrutinized very closely because of the high risks that money lenders might get into.
Advantages:
- Possibility to get a credit with a low borrowing rate
- Possibility to borrow money to purchase a property in an expensive area
Disadvantages:
- Some moneylenders might require a minimum initial contribution of 25%, or even 30%
- Additional checks for the provided documents
High-ratio mortgage
If it is needed to borrow an amount that may exceed 80% of the acquisition cost, this loan option might be considered. This mortgage is typically granted to borrowers with an initial contribution of less than twenty percent. It may be approved for borrowers who make an initial contribution equal to 5% of the home’s appraised value.
For this credit type, the default mortgage insurance contribution is added to the initial loan amount.
Advantages:
- you can purchase a property with as little as a 5% down payment
Disadvantages:
- Required additional payments for insurance, which decreases the equity of the purchased home
- The necessity to pay the tax on the amount of the insurance contribution
Collateral mortgage
The key benefit of this mortgage type is that it opens access to additional funds, which increases as the equity of the house grows.
The collateral mortgage serves as secondary security for the creditor and acts as a lien against the property for the full amount owed. This amount might be up to 125 percent of the home’s whole value.
Advantages:
- Provides people with access to extra funds that might be used for paying off the principal mortgage or other financial purposes
Disadvantages:
- Transferring the mortgage contract from one lender to another is not always easy because of the rules that govern mortgage arrangements
- The borrower may not seek additional financing from another mortgage lender or bank other than the lender with which the borrower has signed a mutual contract.
Fixed-rate mortgage
This option is characterized by a determined percentage rate that doesn’t change for the duration period of the loan depending on market violations.
It might be an ideal option for people that want to stay in a purchased home for a long period.
Advantages:
- Peace of mind of a borrower knowing that the number of his regular payments won’t change due to the violations on the market
Disadvantages:
- The percentage rate might be higher than in a credit type with a flexible rate
Variable-rate mortgage
This option is characterized by the borrowing rate that can change according to market violations during the credit term. The borrowing percentage depends on the lender’s prime rate – if this rises or falls, the percentage rate would effectively rise or fall.
Advantages:
- The percentage rate is lower than in fixed-rate loans
- The penalty for breaking or early repayment of a variable rate mortgage
Disadvantages:
- Because of borrowing rate changes, the number of regular payments could become a heavy burden, leading to a default on the loan
- The value of the property could fall in a few years – making it difficult to remortgage or sell the asset
Open mortgage
This option is ideal for borrowers striving to pay off the mortgage or sell their property to somebody as soon as possible – it welcomes large regular payments and puts no penalties on such actions.
Advantages:
- Flexibility in actions – you are free to make a larger payment than you should be making.
Disadvantages:
- If rates go up when your mortgage term ends, you will be faced with a higher mortgage.
Closed mortgage
It is a type of mortgage that imposes many penalties on the borrower – they cannot cancel the contract, pay off the mortgage earlier, or remortgage without paying penalty charges. However, there may be flexibilities in the number of prepayments or changes in the number of regular payments.
Advantages:
- Low-interest rate
Disadvantages:
- Penalties for changes to the terms set out in the contract from the start
Final thoughts
There is no right or wrong answer to the question of which mortgage option is best for you. You should look carefully at the different types of mortgages available and decide which one best suits your needs.