Mortgage Types - Ontario
Friday Nov 29th, 2019
There are many different types of mortgages in Ontario. But, which one is right for you?
Are you afraid of market changes and require a fixed rate to sleep at night?
Do you have a fairly predictable income and want to follow a strict payment schedule?
Or, do you require the ability to borrow and repay more money from time to time?
Do you get regular bonuses and want to apply extra amounts to your payments to bring down your mortgage faster?
Or, do you just want to pay the amount requested and enjoy bonuses as they come?
When deciding on a mortgage take the time to find a mortgage broker or mortgage specialist that listens to your needs. They will guide you through the process and help you find the type of mortgage or combination of features that satisfy your needs. What is the Difference Between a Mortgage Broker and a Mortgage Specialist?
The most common mortgages are highlighted below:
Note: Some mortgage types can be combined to benefit the buyer or seller.
Traditional or Conventional / Low Ratio Mortgages
- Your down payment is at least 20% of the property’s value (purchase price).
- The amount of the loan is low compared to the value of the property.
- Does not require mortgage protection insurance.
High Ratio Mortgages
- The borrower is contributing less than 20% of the Property’s value (purchase price) to the down payment.
- The amount of the loan is high compared to the value of the property.
- The borrower must have mortgage default insurance through the Canada Mortgage and Housing Corporation (CHMC) to protect the lender in case the borrower defaults on the loan. The amount of the insurance is generally rolled into the mortgage amount.
- With current interest rates being low, high ratio mortgages have become quite common.
- Some people, who could afford a 20% deposit, are choosing to put less up front in order to keep extra cash for closing costs or emergency funds.
- The mortgage rate is fixed and locked in for the term of the mortgage.
- Cannot be prepaid, renegotiated or refinanced before maturity without paying a large penalty.
- A set pre-payment limit may be stated in the contract.
- A flexible mortgage that allows you to repay the amount at any time without penalty.
- Accelerated payments are possible.
- Generally, have shorter terms but may include variable rates with a longer term.
- The mortgage rate is generally higher than on closed mortgages with similar terms.
- Are very similar
- The main difference is in the calculation of interest, should the interest rate change, and how it affects your monthly payments or the length of time you will pay off your mortgage.
Adjustable Rate Mortgages (ARM)
Variable Rate Mortgages (VRM)
The mortgage rate varies with the prime rate and may change during your term.
The mortgage rate is originally set up like a standard loan, based on the current interest rate.
The interest rate is reviewed at specified intervals, if the market has changed. Therefore, your interest rate may be changed. The change will either affect your monthly payments or the time required to pay off your mortgage. This is where ARM and VRM mortgages differ.
The interest rate of the loan and will affect your monthly payment amount.
The interest rate change will not affect your monthly payment amount however the amount applied to your principal amount will vary. This, in turn, will affect the time required to pay off your mortgage.
If the interest rate goes down you will benefit over a fixed rate mortgage.
Making slightly higher payments than required would help you weather the ups and downs of interest rates during your term. If there are no ups, your mortgage will be paid faster.
- The mortgage rate is fixed for a set period of time, such as 1, 3, or 5-year period (term).
- Easier to manage a budget when payments wdo not change.
- The mortgage rate is a bit higher than for variable rate mortgages.
- What you gain in stability you lose in paying a bit more in interest.
- This is the mortgage to choose if the interest is low and you expect the rate to rise during your term.
- Pre-payment, partial or full repayment of the mortgage is allowed in order to pay down the mortgage quicker.
- A mortgage that can be moved from a variable to a fixed rate, or a shorter to a longer term, at any time without penalty.
- When the mortgage is converted the current interest rate for the new mortgage will be applied.
- A good option to take advantage of a current low interest rates when you expect the rates to rise in the future.
A Hybrid Mortgage (or 50/50 Mortgage)
- A combination of a fixed and variable rate mortgage.
- Part of the loan is financed at a fixed rate and the other part is financed at a variable rate.
- The terms may be different for each.
- This type of mortgage may be difficult to transfer to another lender.
- You benefit from stability and falling interest rates.
Reverse Mortgage (Home Equity Conversion Mortgage)
- Allow you to transform the equity in your home to cash while still living in your home.
- A good option for people nearing retirement who have a significant amount of equity in their home, who don’t plan on moving, and need to supplement their retirement income.
- A mortgage that can be transferred from one home to another.
- Will not incur a penalty for breaking a mortgage contract and the interest rate will not change from your original mortgage.
- The mortgage is transferred from a seller to a buyer.
- The lender must approve the transfer.
- All terms and conditions are the same (essentially - just the names on the mortgage papers are changed)
Home Equity Lines of Credit (HELOC)
- A line of credit which is secured by your home.
- The credit limit is calculated as a percentage of your home’s appraised value.
- The Heloc allows you to borrow money on your home’s equity.
- HELOCs can be used instead of a traditional mortgage, up to 65% of the property’s assessed value.
- The interest rate is tied to the prime rate and can change anytime.
- Your total amount borrowed can be increased or decreased, within your credit limit, without the lender’s permission.
- Therefore, you can borrow additional funds if needed. When you pay off the additional borrowed amount, the funds will be available to use again, if needed.
- You may have the option of making a minimum payment (just the interest), instead of your full payment. However, doing this will increase your overall loan cost and the time required to pay off your mortgage, since you are not paying off the principal. Your payments may also need to be adjusted higher in the future.
- Can pre-pay the variable portion at any time without penalty.
Cash Back Mortgage
- Offers you a percentage of the to be purchase property as cash upfront and can be used for anything except the down payment.
- The interest rate is high.
- When the home purchaser needs cash quickly.
- Ex: The down payment to purchase the home leaves you with no extra cash for furniture, appliances or moving expenses.
- Your lender could loan you more money, as your home equity increases, without refinancing the mortgage.
- Has serious consequences if you miss a payment; the lender can raise your interest rate up to 10 percentage points.
- It is not transferrable to another lender, even at the end of the term.
- Be careful, this could be included in the fine print of your mortgage papers.
- A middle man (or woman) working between you and the bank.
- They do not work for a bank.
- They shop to get the best deal for you. It may be from a bank, credit union or other lender.
- They do the negotiating.
- Often, they will get a better rate since they work with smaller lenders.
- If you have issues with credit (a low credit score), a broker may find a lender for you when the bank has refused to lend you money.
- Rates are generally cheaper than from a bank.
- Are often self-employed.
- How are mortgage brokers paid?1
- Works within a bank.
- You do the research from online websites and loan rate comparisons.
- You do your own negotiating with the bank.
- The advantage comes with brand loyalty; putting all your eggs in the same basket such as getting a mortgage and a Home Equity Line of Credit at the same time.
- Many people get a mortgage from the same bank where their bank accounts are kept.
- Suggestion: you can visit with a mortgage specialist at another branch of the same bank. They will often negotiate different rates.
Mortgage payments – include a principal amount and an interest amount. Your payment will be a combination of both. The percentage of both will change as you pay your mortgage.
Ex: 1st year – your interest payment will be high and payment on principal will be low
24th year – your principal payment will be high while your interest payment will be lower
Home’s equity – The amount you have paid off towards your mortgage (without interest)
Or - the difference between the value of your home and the unpaid balance of your current mortgage.
Credit score: is a measure of your financial health and shows lenders how risky it us to lend you money. Having a credit score above 680 will go smoothly. Having a credit score between 600 and 680 will involve more intense scrutiny of your financial history. A score below 600 will generally mean a big bank will not approve your loan and you will need to use a mortgage broker to find a lender. Or, the lender may approve your loan at a lower amount, require a larger down payment or require someone to co-sign with you on the mortgage.