When it comes to homeownership, there are a variety of different types of mortgages in Canada to choose from. Whether you are a first-time homebuyer or a seasoned homeowner, it is important to understand the different types of mortgages available and which may be right for you. From fixed-rate mortgages to variable-rate mortgages, reverse mortgages, and high-ratio mortgages, understanding the differences between each type can help you make an informed decision when choosing a mortgage. Let’s explore the different types of mortgages and their respective benefits so that you can make the best decision for your financial situation.
Fixed-Rate Mortgage
A fixed-rate mortgage in Canada is a loan in which the interest rate remains fixed for the duration of the loan, usually for a period of 1 to 5 years. This type of mortgage allows for consistent and predictable payments, making it an attractive choice for homeowners who want to know how much they will pay each month. Additionally, a fixed-rate mortgage can provide some protection from rising interest rates. This way, homeowners can have peace of mind that their interest payments will remain the same, regardless of how the interest rate fluctuates.
As with any type of loan, there are also potential downsides to a fixed-rate mortgage. Because the interest rate stays the same throughout the term, homeowners may end up paying more in total interest if interest rates go down during the course of the loan. Ultimately, a fixed-rate mortgage can provide predictability, making it an excellent choice for those looking for an effective and long-term way to manage their mortgage payments.
It is worthy to note that being in a fixed rate mortgage will inhibit one to benefit from the drop in interest rates as it will require breaking the mortgage with a penalty in order to benefit from a rate drop.
Variable-Rate Mortgage
A variable rate mortgage in Canada is a type of mortgage in which the interest rate on the loan fluctuates with the changes in the prime rate. The prime rate is the rate that Canada’s major banks use to lend money to their most creditworthy customers, and when it goes up, the interest rate on a variable rate mortgage increases too.
A variable rate mortgage is an attractive option for many borrowers in Canada. It allows borrowers to benefit from the decrease in the prime rate if it goes down, as the interest rate on their variable mortgage would also decrease.
In a decreasing interest rate environment, having a variable rate mortgage is the only way to benefit with dropping rates without costs involved.
Reverse Mortgage
A reverse mortgage in Canada is a loan designed specifically for homeowners aged 55 and over. This type of loan allows them to unlock the equity in their home, with the flexibility of not having to make any payments while they are still living in their home. The money received through a reverse mortgage is used for a variety of reasons; purchasing another property, debt consolidation, increase monthly income, disburse their estate proceeds before they die. There are no pre-payment penalties, so if they choose, homeowners can make payments when they are able, and their balance will be reduced.
At the end of the loan, the borrower, or their estate, will have to repay the money borrowed and any interest that has accrued. The interest is calculated on the borrowed amount and only becomes due when the last surviving homeowner moves out of the property or passes away. A reverse mortgage can be an excellent option for older adults who still need additional funds to make ends meet and stay in their own home.
High-Ratio Mortgage
Rather than a type of mortgage like a fixed-rate, variable-rate, or reverse mortgage, a High-Ratio Mortgage relates to the amount of money one contributes as a down payment. A high-ratio mortgage is a mortgage in which the borrower has a loan-to-value ratio of more than 80%. Put simply, the borrower’s down payment is less than 20% of the purchase price.
A high-ratio mortgage can be either a fixed-rate or variable-rate mortgage, but it typically carries additional risk due to the amount of debt being taken on. To mitigate this risk, the lender requires that the borrower purchase mortgage insurance to protect them against default.
This default insurance can be added to the mortgage and paid back as part of the mortgage payment.
Final Thoughts About the Different Types of Mortgages
In Canada, there are several types of mortgages to choose from. Choosing the right kind of mortgage for your needs can be time-consuming and stressful. Let a Mortgage Broker like Ottawa Mortgage Market Team help guide you through the process of choosing the right mortgage and the best possible rate.
