First time buyers always wonder as to what their options are about Mortgages. We hope this article helps them understand as to what are different types of mortgages in Canada, and subtypes of a mortgage.
There are two types of mortgages in Canada, and each has two sub-types.
Type of Mortgages:
- Open Mortgage – is a type of mortgage which could be repaid to the lender anytime without paying any pre-payment penalty. It is typically used by borrowers who know they will be repaying the amount in relatively shorter period of time. This type of mortgage typically comes at a higher lending rate.
- Closed Mortgage – is a type of mortgage that is negotiated for a specified period of time and cannot be repaid prior to the end of the term without any penalty. These mortgages come at relatively lesser interest rate compared to open mortgages but the penalty could be huge. There are two types of penalties that are associated with closed mortgages. To understand that in detail please read our blog Mortgage Pre-payment Penalty
Sub-types of Mortgage:
- Fixed Rate Mortgage
- Variable Rate Mortgage
Fixed Rate Mortgage – is a mortgage that has the same rate of interest throughout the term of the mortgage. Term of the mortgage is the period of time for which the mortgage is negotiated. The monthly payments of the mortgage stay the same irrespective of the changes in the prime rate of the lender.
Variable Rate Mortgage – is a type of mortgage in which the interest rate is tied to the Prime Rate of the lender which is further tied to the Prime Rate of Bank of Canada. The monthly payments can go up or down depending if the prime rate has gone up or down. Bank of Canada’s Prime Rate is typically altered based upon the economic conditions.
IMPORTANT FACTOR that the borrowers need to be aware of is the fact that the Variable rate mortgage can be converted into fixed rate mortgage (at the prevailing rate of lender) without any penalty but the Fixed Rate mortgage cannot be converted into a variable rate mortgage without paying the penalty.
Which mortgage you should opt for?
This decision would depend upon the forward-looking knowledge of the economy and the ability to pay the increased payments in case the Prime rate goes up. For example, if the economic outlook looks gloomy for the foreseeable future, it is better to stick to variable rate mortgage but if the borrower doesn’t have the ability to pay increased monthly payments or if the borrower wants to stay on a fixed budget, a fixed rate mortgage is a better choice for him/her.
Guidance from the right mortgage advisor or the experience of your realtor might come in very handy in opting for either the fixed or the variable rate mortgage. In fact, your Realtor can be first point of contact in guiding regarding various decisions in the home buying process.
About Sunil Saini:
The writer Sunil Saini, Broker - Century 21 Legacy Ltd is an experienced Full-time Realtor for over 16 years serving Mississauga, Brampton, Toronto and surrounding cities. He has an MBA in Finance from the Schulich School of Business. His education combined with his vast experience works wonder to benefit his clients. He has earned numerous awards and ranks among the Top 1% nationally among all the Century 21 Realtors based upon the gross commissions earned for 2019. He could be reached at 4163719252 or followed on Facebook at sunil.saini.106