The many types of mortgages in Canada
When it comes to buying a new piece of property, you’ll need to familiarize yourself with what mortgages are and how they work. As you go through the application process, you’ll also discover that you have a number of options available to you regarding your mortgage. While the loan is the main component of the mortgage, there are many variations in terms of the length of the repayment period, interest rate and the flexibility the mortgage provides to repay it earlier without penalty.
In Canada, you can find up to fourteen different mortgage options, such as reverse mortgages, open variable rate mortgages, or cash-back mortgages, and those are just to name a few. The best mortgage suited for you is different from the mortgage that’s best for your neighbour, so coming to a choice takes a lot of consideration and understanding of your goals. While there are many types of mortgages, only some are applicable to residential properties.
Convertible vs open vs closed mortgages
One key consideration when selecting a mortgage is the frequency of payments – this is something that is negotiated in the contract between the mortgagor (the borrower) and mortgagee (the lender). The most common choices are monthly or biweekly, but you can also choose to pay weekly if your finances are able to take that on. Be sure to choose the kind of payment flexibility that benefits you now and, in to the future, in case you want to refinance or sell your home.
Another consideration is the ‘structure’ of the mortgage. Here are the three main mortgage structures:
Open mortgages
If you’d like a more flexible payment option, this is the way to go. In an open mortgage, the mortgagor is free to pay an additional amount of money to their regular payments. Even just adding $50 to a payment here and there or using your tax return towards it can lead to you paying off your mortgage faster.
Closed mortgages
During the phase where you’re making regular payments, there will be restrictions on the amount that you pay. Because it is less flexible, you’ll have to stick to the initial agreement until you have to renew or you pay if off completely. Despite appearing rigid, closed mortgages are safe options and usually have lower interest rates than open mortgages.
Convertible mortgages
The previous two types of mortgages have desirable advantages, and the way to get both is by going for a convertible mortgage. If you choose a convertible mortgage, you’ll have the flexibility to switch between open and closed mortgages. It has lower interest rates than open mortgages, and you’ll be able to contribute extra payments if your financial situation allows you to.
Hybrid vs variable vs fixed mortgage
When you see or hear the words hybrid, variable or fixed, they are referring to the kind of interest rate you’ll get attached to the mortgage. The main factors that affect mortgage rates include your credit score and the interest rate environment at the time. Before deciding whether to choose variable, fixed, or hybrid, you’ll need to consider what is best for your goals and financial situation.
Fixed rate
Your mortgage’s interest rate will not change during the term of your mortgage regardless of the changes in the market rates or your financial situation. This is the safest option, especially if you know that the rate that you’re being offered is one of the better ones. Fixed rates are also more attractive in the current interest rate environment as rates have been continuously rising. Negotiating a fixed rate mortgage means your payments will not change but is usually offered at a higher rate because the bank is committing to a fixed rate for up to 10 years and you are paying for the certainty in your interest rate.
Variable rate
The interest rate attached to your mortgage will fluctuate as the Bank of Canada’s prime rate does, potentially changing your payments. Because of how much the interest rate may change, having a variable rate is usually a good option for only those who can handle the possibility of rising payments. The interest rate on a variable rate mortgage will fluctuate as the Bank of Canada’s prime rate changes. While this may mean your monthly payments will increase, variable rate mortgages are offered at a lower rate because the bank has the security of knowing the interest they will be paid will increase if the Bank of Canada’s rate increases.
Hybrid rate
You can assume that hybrid implies a mix of fixed and variable rate. In this case, some of the mortgage is protected by fixed rate if the market rates ever rise; the other portion provides the benefit of lower payments if the rates decrease.
Other common mortgage choices
The previous options are usually hand in hand with each other, meaning you can have something like a closed, fixed-rate mortgage. The next few options are usually additional perks or for certain circumstances.
Cash-back mortgages
As the name implies, when you choose this option, you could receive a small percentage of the size of the mortgage paid back to you as cash. If the house you’re purchasing is in need of a makeover, taking advantage of a cash-back option may be a great way to fund the upgrades.
Reverse mortgages
A mortgage designed for people who want to use the equity in their home for a variety of purposes and not make regular payments. In this case, the borrower is not making regular payments to pay off the mortgage but the opposite is actually happening. The interest on the mortgage accrues during the term of the mortgage and the outstanding balance grows over time. As a result, reverse mortgages are usually considered for Canadians at a later stage in their lives who want to stay in their home and use their home’s equity for their financial needs. Typically, reverse mortgages are only offered to Canadians who are over 55 years of age.
Second mortgages
After making payments on your mortgage for a number of years (and if the value of your home increases), you build equity in your home. With built up equity, a second mortgage may be an option to consider for your financial needs. A second mortgage is used for acquiring additional property, but can also be used towards debt consolidation or home renovations. A second mortgage is a separate obligation from the first mortgage on your property and allows the borrower to maintain the terms of their original mortgage contract while obtaining additional funds through a second mortgage.
Mortgages offered by Alpine Credits
Alpine Credits offers a certain type of mortgage called home equity loans, which are very similar to second mortgages. Home equity loans aren’t specifically mortgages and can be used in a lot of ways, such as debt consolidation or towards a business investment; many choose to put it towards the down payment for another piece of property.
Home equity loans are available for any homeowner at Alpine Credits, and with us, your credit score or income history do not affect your chances of approval. As long as you have paid at least 25% of your mortgage, you could be eligible to access up to 80% of your property’s equity. Contact one of our Financial Solutions Specialists who can answer any question you might have regarding home equity loans and even on mortgages.
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