Let’s select the right mortgage that is tailored to your needs:
Conventional or High Ratio Mortgage
Conventional Mortgage: You may qualify for a conventional mortgage if your down payment is at least 20% of the purchase price or the appraised value of the property (whichever is less). You may choose from a fixed or variable interest rate for this mortgage and a conventional mortgage does not have to be insured against default. However, if the amount of your mortgage is more than 80% of the purchase price or appraised value, you will qualify for a high-ratio mortgage.
High-Ratio Mortgage: Many lenders offer an insured mortgage with a lower than 20% down payment – as low as 5%. Therefore, where the down payment is between 5% and 19.9% the mortgage must be insured to cover potential default payment. Canada Mortgage and Housing Corporation (CMHC) or Genworth Canada are insurers and they charge a fee for this service. Fees are calculated according to the percentage of your down payment and the total amount you are borrowing to finance your purchase. A trusted mortgage advisor will help you determine the exact amount. You may choose to pay the fees up front or they may be added to the principal portion of your mortgage.
Fixed or Variable Rate Mortgage
Fixed Rate Mortgage: A fixed rate mortgage is a ‘locked-in’ interest rate for the entire term of your mortgage. Your interest rate, amount of regular mortgage payments, amortization, and the portion of your payment that goes towards the principal and interest is secured.
Variable Rate Mortgage: A variable rate mortgage is a fluctuating interest rate that varies with the prime interest rate. As the interest rate varies from month to month your payment amount will remain the same. As a result of the interest rate fluctuation, the amount your payment that is applied toward the interest and the principal will change. For example, if the interest rate drops, a larger amount of your mortgage payment is applied to the principal balance owing; you may be able to pay off your mortgage faster.
Short Term or Long Term Mortgage
Term of a Mortgage: The term of a mortgage may be six months to 10 years and refers to the length of the current mortgage agreement. Typically, the lower the interest rate, the shorter the term of the mortgage. At the expiry of your mortgage term, you may choose to repay the principal owing on your mortgage or to enter into a new mortgage agreement at the then current interest rates. Ultimately, you must feel comfortable with your mortgage payments.
Short Term Mortgage: If the term of a mortgage is two years or less, it is considered a short term mortgage. Some buyers who believe interest rates will drop at renewal time may prefer this mortgage term.
Long Term Mortgage: If the term of a mortgage is three years or more, it is considered a long term mortgage. Borrowers who prefer the security of budgeting for the future (along with reasonable current interest rates) may prefer this mortgage term.
Open or Closed Mortgage
Open Mortgage: Open mortgages may be paid out at any time without penalty. You may also choose to make additional payments without penalty. Should you wish to have the flexibility to make large, lump sum payments, or you wish to sell in the very near future this mortgage may be suited to you.
Closed Mortgage: Closed mortgages require you to commit for a specific term. Most closed mortgages do not allow you to pay out the mortgage early without incurring a penalty. However, some lenders allow you to pay out up to 20% of the original principle balance yearly (this may vary according to the lender). Although more restrictive in terms of making lump sum payments against the principal, this mortgage is also more stable.