Types of mortgages in Canada and how they apply to you
22 October, 2018 / by Glenn Carter
Before deciding the types of mortgages that may be right for you, you’ll have to make another important decision – the type of lender you’d like to work with.
In Canada, there are three main types of lenders: A lenders (banks, credit unions and monoline lenders), alternative lenders, and private lenders. The A lenders (big banks) control the lion’s share of this market, but that doesn’t mean there aren’t other options out there.
Credit unions and monoline lenders are also worth considering. You may be able to find a mortgage product better suited to your needs at a lower interest rate with lower mortgage penalties. You won’t know unless you take the time to explore these options with a mortgage broker.
Now that you have a basic understanding of lenders, let’s take a look at the types of mortgages in Canada and how they apply to you.
Conventional Mortgages: These are the types of mortgages where you’re making a minimum down payment of 20 percent. The loan-to-value would most likely be 80 percent or less, since the lender is financing the remainder of the home purchase. You are not required to purchase mortgage default insurance in this case, although your lender will likely require that you buy home insurance as a condition of the mortgage.
High Ratio Mortgages: When you have a down payment of less than 20 percent, then your mortgage is considered high ratio. In this case, the property’s loan-to-value would most likely be over 80 percent. As such, you’re required to get mortgage default insurance. Contrary to popular belief, mortgage default insurance doesn’t protect you. It protects your lender in the event that you default (fail to repay) your mortgage. Mortgage default insurance is typically rolled into your mortgage and paid along with your regular mortgage payments.
Open/Closed Mortgages: An open mortgage is where you can pay off the mortgage in full at any time without facing a penalty. A closed mortgage, on the other hand, is a mortgage where you’re restricted by the amount you’re able to pay towards the mortgage. Open mortgages typically come with higher mortgage rates than closed mortgages. That being said, closed mortgages usually come with some prepayment privileges, such as increasing your payment and making lump sum payments.
Fixed Rate Mortgages: With a fixed mortgage, your mortgage rate remains the same during your mortgage term. Mortgage terms commonly vary in length from one to five years. Five-year fixed rate mortgages are popular among Canadians because your mortgage rate is guaranteed to remain the same for five years. The rates on fixed rate mortgages are based on the government of Canada bond yields of similar terms.
Variable Rate Mortgages (VRM): With a variable rate mortgage, your mortgage rate can vary (change) during the mortgage term. This happens when your lender changes its prime rate (this likely occurs when the Bank of Canada changes its overnight lending rate). The rate on variable rate mortgages is typically lower than a fixed rate, although it’s important to be aware that your rate can go up during your term. Although there’s the potential to save money, it’s not for the risk averse.
Portable Mortgage: Portability is a common mortgage feature of most institutional mortgages. With a portable mortgage, you can transfer it from one property to another without facing a penalty or requalifying. Not every lender offers this and there are specific terms and conditions that you must follow, so make sure you understand before signing on the dotted line.
HELOCs: As the name alludes, a home equity line of credit (HELOC) lets you borrow equity from your home. Although you can use the funds as you see fit, common uses include debt consolidation and home renovations. You can borrow up to 65 percent of the value of your home as a HELOC (provided your HELOC and mortgage don’t exceed 80 percent of your home’s value).
Cash Back Mortgage: These are types of mortgages whereby you receive cash up front. These funds can be used towards anything except your down payment (i.e. moving expenses, furniture, etc.). The interest rate tends to be higher on this type of mortgage. You’ll also be required to pay back the cash on a prorated basis if you break your mortgage during the term.
Renovation Loan: Many of the above lending products can be packaged as a renovation loan, where funds are used to increase the value of a home through additions. These can include new windows, decks, basements, remodelling, driveway extensions, and more.
Reverse Mortgage: These are types of mortgages where homeowners who are 55 years old or older can borrow against the equity in their home, receiving it as a lump sum or monthly payment. A reverse mortgage usually makes the most sense for seniors on a fixed income who otherwise don’t qualify for a HELOC. When the property is sold or the homeowner passes away, the amount for the reverse mortgage is payable to the lender.
Bridge Mortgage: A bridge mortgage (or bridge financing as it’s commonly known) is a temporary loan when you sell your current home and buy a new one. Bridge financing is needed when your closing dates don’t match up (i.e. the closing date on your new home is sooner than your current home).
Second Mortgage: A second mortgage refers to a property with at least two mortgages. As the name alludes, a second mortgage comes after your initial (first) mortgage and typically has a higher interest rate. A first mortgage simply implies that there is only one loan secured against your property such as a conventional or high ratio mortgage noted above.
Commercial and construction lenders
Commercial Lenders: A commercial lender is a lender who offers commercial mortgages secured by a commercial property, such as an office building, apartment building or shopping centre. The mortgages funds are typically used to acquire or redevelop a commercial property.
Construction Lenders: A construction lender is a lender who offers mortgage financing that can be used towards the construction of a real estate development. This is the financing that can help get shovels into the ground on a new development.
As you can see, there are a number of different types of mortgages that may apply to your particular financial situation. This is why it’s important to work with a mortgage professional to help you navigate the various mortgage types.
Whether you are applying for a brand new mortgage, refinancing, or need some quick cash with a second mortgage, there are various types of mortgage products that can help you achieve your goals. Before automatically jumping to one of the big Canadian banks, consider your options with alternative lenders.
They may have exactly what you are looking for—at better terms and lower rates!