While shopping for a mortgage, most people focus on just the rate, however the options and terms of your mortgage are equally as important. Whether it is open or closed, and how much additional payments you are allowed to make, can help save you thousands in interest. Here’s a breakdown of the most common mortgage options out there today:
Residential mortgages are divided in two categories:
High Ratio Mortgages – When your down payment is 20% of the value of the property or less. (Must be insured by Canada Mortgage and Housing Corporation (CMHC) or Genworth Financial Canada, premiums are determined by loan to value ratio)
Conventional Mortgages – When your down payment is 20% or more of the value of your property. (Usually does not require mortgage loan insurance (CMHC or Genworth))
Closed Mortgages – Does not allow any prepayment or early repayment of the mortgage, except on the sale of the property before the term ends. (These are becoming less popular; today home buyers seek flexibility of open mortgages)
Open Mortgages – Borrower can prepay all or part of the principal amount at any time with or without notice or penalty. Specific conditions are outlined in the contract.
Basic payment options include:
Double up – Doubling the dollar amount of scheduled principal and interest payments (regular scheduled payments)
Lump sum options – prepay a certain amount of principal, often worked with the double up option.
No cost switching of payment frequency – option to switch scheduled payment from monthly to semi-monthly, bi-weekly or weekly.
Skip payment option – option to skip one regular payment (or 2 bi-weekly payments etc.) without defaulting the mortgage.
Fully Open Mortgages – Allow principal payments to be made in any amount, anytime, in addition to regular payments. Usually have short terms of six months to a year and interest rates are higher than closed mortgages. (Great for buyers who plan on quickly re-selling the property or those buyers who will run into a lump sum of money)
Fixed Rate Mortgages – Interest rate is determined and remains until the end of the term. Fixed rate mortgages with longer terms are popular when interest rates are low and an expected interest rise is near.
Variable Rate Mortgages – Also known as adjustable rate mortgage, the interest rate charged on the mortgage will fluctuate with market interest rates.
Convertible Rate Mortgages – is a variable rate mortgage with option to lock into a fixed rate mortgage at anytime without penalty.
SECTION IV – SPECIAL FEATURES
Cash Back – Borrow cash based on a percentage of the mortgage principal. This can range from 1%-7%, but cannot be used as a down payment.
Assumable Mortgage – Allows the purchaser to take over the mortgage already existing.
Portable Mortgage – Allows you to transfer your current mortgage to your new property. (Subject to appraisal and credit approval)
Air miles or bonus points – Some lenders offer flyer miles or other bonus incentives
Step Mortgages – Additional to your mortgage, a line of credit will be attached in one package. It’s money when you need it, great for consolidations or future investments.
SECTION V – NICHE PRODUCTS
Vendor Take-back – Also known as seller take-back mortgages, the seller will agree to hold the mortgage. A second mortgage may extend incase the first mortgage cannot cover the equity. The vendor can sell the mortgage to a finance company at a later date.
Blanket Mortgage – Single mortgage registered against two or more properties. Great for financing cottages and lenders appreciate the additional security.
Collateral Mortgage – Persons with business loans can use their homes as additional collateral on top of the business and its assets.
Reverse Mortgage – Also known as a reverse annuity mortgage; this is not a typical mortgage. Only available to homeowners with a large amount of equity where owners can convert equity into monthly income streams. This mortgage is great for seniors with little or no mortgage.