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The Different Types of Mortgages.

Conventional Mortages:

Open mortage

A mortgage which allows you to pay off the mortgage at any given time without any penalty. While these are mostly for a shorter period of time, they also have higher interest rates compared to a closed mortgage.

Closed mortgage

With a closed mortgage, you are not able to prepay your mortgage, nor are you able to renegotiate or refinance before maturity. You must adhere to the terms as set out in the agreement, with little to no flexibility.

Fixed rate mortage

The interest rate over the term you select (could be anywhere form 1-10 years) does not change, meaning interest and principal payments will remain constant, regardless of a change in the Canadian prime rate. The mortgage rate will not fluctuate as long as you are in a term agreement. This option will ensure that you know exactly how much you will be paying, is less risky, and easier to budget for.

Variable rate mortgage

When a fixed rate is not the best choice, a variable mortgage rate will provide you more flexibility. The interest rate fluctuates with the index, therefore while you may pay less if the interest rate falls, you will conversely pay more if it rises. Banks offer a closed and open variable interest rate mortgage where you have the ability to lock in your mortgage rate at any time.

High-ratio mortgage

When you put a downpayment on a home that is less than 20% of the purchase price, you are required to have mortgage loan insurance, which will help protect lenders against mortgage default. With mortgage loan insurance, you are able to purchase a home for a minimum of 5% downpayment with comparable interest rates. The insurance premium can either be paid in advance, or added onto the mortgage resulting in increased payment amounts. High-ratio mortgages are acquired through Canada Mortgage and Housing Corporation (CMHC ).

Convertible mortgage

The term for this type of mortgage can vary between banks, but is normally 6 months to a year. The benefit of this option is that you are able to convert to a longer term closed mortgage without paying any penalties.

Special Mortgages:

Vendor take-back mortgage

This type of mortgage involves the seller taking back a mortgage for part of the sale price of the property. In other words, instead of borrowing from a financial institution, the person selling the home is the one that finances the mortgage. The title is transferred to the buyer, and the mortgage payments are payed directly to the seller.

Agreement for sale

Also called right to purchase, this type of mortgage is an alternative to a vendor take-back, as the purchaser obtains possession despite not paying the full purchase price. On the contrary, title is not immediately transferred to the buyer, instead the seller delays the title transfer until the full purchase price is paid which is usually done in instalments.

Collateral mortgage

If the buyer has access to additional security for the debt, either through a home that is personally owned, or owned by someone else, it can be used as collateral, or a source of equity for the loan. A separate mortgage would be placed upon the secondary property of either the borrower or a guarantor (home owned by someone else).

Wrap-around mortgage

When the buyer is somehow unable to obtain a mortgage, a wrap-around mortgage acts as secondary financing. The seller still assumes responsibility for the existing mortgage, but the buyer makes a downpayment at the time of sale and signs a promissory note for the remainder of the sale price plus interest. The bank is excluded from this transaction, and closing costs are avoided, however the seller benefits from charging the buyer a higher interest rate. A wrap-around is attractive to sellers because they can leverage a lower interest rate on the existing mortgage into a higher yield for themselves.

These are your basic explanations of the types of mortgages available to you, so you are more aware of the variety of options at your disposal. Each bank has its own unique offering of mortgage products, so consult a mortgage professional and choose the one that suits your needs.