Types of Mortgages in Canada

August 29, 2011

Most people need to obtain a mortgage when they are purchasing a property in Toronto. There are different types of mortgages available, depending on your needs.

Pre-Approved mortgages

A pre-approved mortgage allows you to start your home search, based on qualifying for a mortgage in advance. You will be given the best rates, and the rate will be guaranteed for up to 120 days.

Conventional mortgages

If you have 30 percent of the purchase price or more, as a down payment, you can apply and be eligible for a conventional mortgage. Depending on the type of property or location, you may be required to obtain Canada Mortgage and Housing Corporation (CMHC) insurance, or Genworth Financial Canada (GE Canada) insurance.

High ratio mortgages

If you have 5 to 30 percent of the purchase price as a down payment, you will need to apply for a high-ratio mortgage. A high ratio mortgage needs to be insured through Canada Mortgage and Housing Corporation (CMHC), or Genworth Financial Canada (GE Canada). This type of mortgage insurance allows you to qualify for a high-ratio mortgage. An insurance premium is charged when you receive your funds. The insurance amount can be included in the mortgage payments or paid separately. The premium payment is calculated by multiplying the amount of the mortgage with the percentage of the total purchase price.

Open mortgages

An open mortgage is a type of mortgage that allows you to pay back part or the entire mortgage without penalties. These mortgages have shorter terms, usually six months to one year. They come with higher interest rates than closed mortgages.

Variable mortgages

A variable or adjustable rate mortgage payment will change as the prime rate interest changes. The calculated principal and interest rate will change. When interest rates drop, more of your payment will go to the principal. When interest rates rise, the opposite will occur. Some variable rate mortgages allow you to pay off part of your mortgage or all of it, without penalties, or some will charge and penalty. Interest rates are compounded monthly on most variable rate mortgages.

Capped rate mortgages

A capped rate mortgage is a variable rate mortgage which has been capped at a certain interest rate. Your lender sets the rate and if interest rates rise higher than your capped rate, you will not be affected. These mortgages are not portable and have a penalty for full payment.

Closed mortgages

Traditionally, a closed mortgage meant that you could not pay the mortgage in full or partial payments without a penalty, except for a sale of the property. There have been changes to this type of mortgage and there are ways to pay it off quicker.

Fixed Rate mortgages

A fixed rate mortgage means that your interest rate is locked in for a period of time which could be from three months to 30 years. The rates are also lower than an open mortgage. If mortgage rates are predicted to rise, this is often the best choice. Lenders have different options available for prepayment of a mortgage, although many impose penalties, sometimes a hefty payment.

Convertible mortgages

A fixed rate mortgage for a short six month or one year term can be converted to a longer term without penalty as long as you stay with the same lender.

Bridge Financing

Bridge financing is a short term loan that is provided when you have a gap to cover between the sale of one property and the acquisition of another and the purchased property closes before the sold home. You will have two mortgages to carry. A bridge loan covers this period.

Reverse mortgages

A reverse mortgage is available through the Canadian Home Income Plan. This type of mortgage allows a homeowner to convert the equity in their home into cash. There is no need to sell the property and there are no monthly payments. A homeowner applying for this type of mortgage must be 62 years of age, or older and have a significant amount of equity in the property. This mortgage is available in Ontario and British Columbia. The older a person is, the more that they can borrow. You can borrow between 10 and 40 percent of the appraised value. A homeowner will retain ownership and can still reside in the home. When the homeowner dies, the property is sold and the loan and interest are repaid. Interest is continually accruing on this type of mortgage and there many not be much money left from the sale of the property after this loan is paid off.

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