Different Categories of Mortgages in Canada

by

D Morris

You need to settle for the mortgage that is best for your situation your tolerance for risk, economic conditions and your personal financial situation. Understand the different types of mortgage available in the Canadian market.

The mortgage companies in Canada allow for not just the traditional fixed rate and adjustable mortgage rates but have a variety of other options; there are variations to each of these basic mortgage plans.

The mortgage loans in Canada could be open mortgages or close mortgages. While the former lets you repay the mortgage without any penalty and are available in shorter terms, between 6 months and one year only, in the case of the latter the payment period is from 6 months to 10 years. Interest rates on open mortgages are at least 1% higher than in the case of closed mortgages.

You go in for this type of mortgage loan only if you are planning to sell off the house or property earlier than expected or are able to pay off the entire mortgage due to a sudden windfall, expected or unexpected! In a closed mortgage scenario, as much as 20% of the prepayment of the original principal is allowed. And if you would like to break the mortgage, the penalty is 3 months interest.

Check with the home loan broker or mortgage loan officer to know the latest on the clause of breaking a closed mortgage prematurely. You can even opt for a convertible mortgage that lets you change from a short-term to a long-term loan, in case your financial conditions change.

In the case of a conventional fixed rate loan, you’ll not suffer from the vagaries of the Canadian real estate market; whether the price of your property appreciates or depreciates, the amount you pay the bank stays the same. You know exactly how much you are paying off. This constant amount characteristic could also be the drawback of this scheme. And you would also have to pay higher initial rates.

A fixed-rate balloon has a lower rate than the conventional plan. However, the rates at payoff may not be very enticing and also the paying off of the balloon may require some refinancing. In the case of interest-only loan, even though the monthly installments are lower you would’ve to refinance or renew or repay early. If you are considering an adjustable-rate mortgage (ARM), the advantage lies in the way the market behaves you could be paying at a rate proportional to the prevailing rates. The initial rate is low compared with the fixed rate loan. This is the standard ARM. If you are willing to pay a fee which would enable you to lock in the low rates when the rates fall, then the convertible ARM is another option for you. Here again, there is no stability in payment. In a two-step mortgage, the initial rate is fixed and there is a certain amount of risk as the future rate is unknown. Payments fluctuate in this case as well.

In a graduated-payment loan, you enjoy low monthly payments at the start of the repayment term. But payments increase with time and the mortgage lender could increase the premium. Negative amortization means the borrower ends up owing more money than the original loan amount,this could well be the case in the early years. In balloon ARM, the same disadvantages remain as in the case of a fixed-rate balloon. The drawback of going in for an interest-only ARM is that the principal amount is not reduced.

Before going in for any mortgage deal, speak with your mortgage broker. Even though the mortgage rates are largely the same across Canada, take the advice of several people before taking the plunge. Plus there could be minor variations that the different mortgage lenders in Canada offer.

D. Morris has several years in the lending business and has been a successful real estate investor. He is able to think outside the box and tailor your mortgage to suit your needs. He has access to over 40 lenders and takes pride in being able to build a strong personal relationship with his clients.

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