By: Nataliya Muts

Types of mortgages.

Tags: Types of mortgages.

Conventional Mortgage

This mortgage is for an amount which does not exceed 80% of either the appraised value of the property or the purchase price, whichever is lower. Your down payment is a minimum 20% of the purchase price.

High-ratio Mortgage

With this type of mortgage, you contribute less than 20% of the cost of the home as a down payment and as little as 5%. A high-ratio mortgage requires mortgage loan insurance. CMHC and Genworth (GE) offer mortgage loan insurance and base the premium on the total mortgage amount. This premium can be added to your mortgage payments or paid in full on closing.

Second Mortgage

Second mortgages usually have a higher interest rate and shorter amortization than a first mortgage. Secondary financing is often used when one does not want to break the existing term on a first mortgage. Breaking an existing first mortgage often results in large payout penalties so a second mortgage may be the solutions.
Taking a second mortgage on your home is typically done to free up some cash for any number of reasons. Perhaps a home renovation or landscaping project to improve the value of the property
 

Mortgage Options

 

Assuming an Existing Mortgage

In assuming a mortgage you take over the vendor's mortgage as part of the price you pay for the house. Assuming an existing mortgage is quick and saves you money on the usual mortgage arrangement fees, such as appraisals and legal fees.
When you assume a mortgage, you don't have to arrange financing from another lender and the rate on an existing mortgage may be lower than the prevailing market rate.
Sometimes, if it is specified in the original mortgage agreement, a mortgage can be assumed automatically. If not, you may have to qualify with the lender who holds the mortgage.

Vendor Take Back (VTB) Mortgage

This means the vendor lends you the money to purchase the home. It's basically a second mortgage.
For example, on a home that costs $150,000, if the vendor has an existing mortgage of $70,000 that you can assume and you have $40,000 for a down payment, the vendor may lend you the outstanding $40,000, to close the deal. This amount would be paid back on a monthly basis much like the mortgage.

Interest Rate Buy Down

A vendor - usually a new-home builder - pays the lender a lump sum to lower the mortgage interest rate by up to 3% over a fixed term, usually one to two years.
A lump sum payment often reduces the face rate of a mortgage by as much as 2%. In turn, this increases the mortgage amount for which you qualify.
New-home builders may offer buy downs or discounts on the mortgage rate to encourage sales. But vendor financing is usually not renewable, so you have to be prepared to pay the going market rate when the mortgage is renewed.
The builder may add the amount used to buy down a rate into the price of the home and as a result you may end up paying a more for the property.

Rate of Interest

Interest is the cost of borrowing money and is paid to the lender. Mortgage interest rates are affected by the prevailing market interest rates. Mortgage rates are either fixed or variable.
A fixed rate is locked in so that it will not rise for the term of the mortgage. A variable rate will fluctuate. The rate is set each month by the lender, based on the prevailing market rates. Your monthly payment is fixed to be the same each month for the term of the loan, but the percentage of each payment that goes toward the interest and principal changes.

A variable rate can be a good choice if rates are high when you arrange your mortgage and then fall afterward. But if rates rise, you may want to convert your variable mortgage to a fixed rate.

Also, some lenders offer a protected or capped variable rate. This means your interest rate will not rise above a predetermined limit. However, you usually pay a premium for this protection. See current mortgage interest rates.

Mortgage Term

The term of a mortgage is the number of years or months over which you pay a specified interest rate.
Terms usually last anywhere from six months to 10 years. At the end of the term you either pay off your mortgage in full or renew it. Renegotiating terms and conditions is allowed and encouraged at the time of renewal.
Generally speaking, the longer the term the higher the interest rate. Many experts suggest you select a long term if interest rates are rising. If rates are falling, you may want to select a short term and then lock in the rate when you think rates won't go any lower.

Amortization

This is the amount of time over which the entire debt will be repaid. Most mortgages are amortized over a 25 year period. The longer the amortization, the lower your scheduled mortgage payments will be but the more interest you pay in the long run.

Schedule of Payments

A mortgage loan is repaid in regular payments set up as monthly, biweekly or weekly. The more frequent payment schedules can save you money by increasing the amount paid toward the total mortgage each year.
The more frequently you make your payments, the more principal you repay in a year, and therefore, the lower the overall interest you pay on your mortgage.

Open Mortgage

This means you can repay the loan, in part or in full, at any time without penalty. Interest rates are usually higher on this type of loan. An open mortgage can be a good choice if you plan to sell your home in the near future.
Many experts suggest taking an open mortgage for a short term in times of high interest rates and converting to a longer term when rates fall.

Closed Mortgage

A closed mortgage has a fixed interest rate that is locked for the duration of the term and usually offers the lowest interest rate available. It's a good choice if you like the predictability of know your payment will not change from month to month. Closed mortgages are not very flexible and there are often penalties or restrictions attached to prepayments or additional lump sum payments. It may not be the best choice if you might move before the end of the term. Closed mortgages have terms ranging from six months to twenty years with a five year term being the most common. Generally speaking, the longer the term, the higher the interest rate.

Split or Multiple-rate Mortgage

With this mortgage, you negotiate a portion of your total mortgage loan at one rate and term, and another portion at a different rate and term. In this way you can split your mortgage into two, three or more terms.
There are many more mortgage options available. Some offer a fixed portion and a line of credit portion. To find out more, talk to your mortgage agent as there are many options available.
 

Fixed vs. Variable Mortgage?

 

Fixed vs. Variable Rate?

HELLO!  I’m a fixed rate mortgage and I represent over 70% of the mortgages in Canada.

HI!  I’m a variable rate mortgage and I can probably save you money!

Fixed Rate- Yes you might, but your interest rates and mortgages payments are subject to change and while they may go DOWN, but they may also go UP!

Variable Rate- Yes you are right about that – but studies have shown that if you have the risk tolerance to ride these ups & downs you can save money.

I also am very flexible in that you can convert to a fixed rate term at any time for no fee!

Fixed Rate- Yes but most people are too busy and don’t pay attention to the ups and downs of the market. All they want is the peace of mind of knowing what their mortgage payment will be each and every month.

Variable Rate - But there are some people who will take this risk in order to save money and pay down their mortgage faster. Variable rate mortgages are tied to your lenders prime rate which can be affected by changes in the Bank of Canada rate.

Fixed Rate- But you cannot forecast these rate fluctuations

Variable Rate- No I can’t – my crystal ball is still on order – however because our government will lower rates to spur on the economy, we tend to lean towards having lower rates more often than higher rates. – it takes three times longer to jump start the economy than it does to slow the economy.

Fixed Rate- You should also know that I come in a variety of terms. Although the 5 yr. is the most popular, I’m available for 6 months up to 10 yrs. and even longer

Variable Rate- Even though my rates may change everyone’s goal is to pay off their mortgage as fast as they can at the lowest rates they can get.

Fixed Rate– Confused…Here are some questions that you can ask yourself to determine which product would be better for you..

  1. • Are you financially and mentally equipped to handle fluctuating mortgage rates?
  2. • What is your tolerance for financial risk?
  3. • Are you knowledgeable and diligent in monitoring our economic climate?
  4. • Can you/will you react wisely to market fluctuations?
  5. • Do you value the peace of mind associated with fixed mortgage ?