In Canada, there are more than a dozen different types of mortgages. Some mortgage types are interchangeable with others, while some are meant for specific circumstances. For anybody who owns property or is interested in buying real estate, here are twelve different types of mortgages and how they work:
Type #1: Low-ratio mortgages
Low-ratio mortgages are your conventional mortgage type. These types of mortgages are given when a down payment is provided equal to 20% or more of the property’s value. Low-ratio mortgages do not typically require mortgage protection insurance.
Type #2: High-ratio mortgages
A high-ratio mortgage is when a borrower is contributing less than 20 percent of the property’s value towards a down payment. As required by law, any high-ratio mortgage is required to maintain mortgage default insurance through either Canada Mortgage and Housing Corporation, Genworth Financial, or Canada Guarantee.
Type #3: Long-term fixed rate mortgages
Fixed rate mortgages are one of the most popular types of mortgages. The ‘fixed rate’ means predictable monthly payments spread over a term usually lasting decades.
Approximately 90 percent of homebuyers will choose a fixed rate mortgage with a longer term. This helps homeowners afford more expensive properties while lowering their monthly payments to a comfortable rate.
Type #4: Shorter-term fixed rate mortgages
Shorter-term fixed rate mortgages have become gradually more popular than long-term mortgages, since the economic crisis over a decade ago. Among banks refinancing mortgages, a lot have found homeowners are moving to shorter terms.
The advantage of a shorter term is having the stability of a fixed rate while paying off your house sooner. Though monthly mortgage payments increase on a shorter term, you also end up paying less interest in most cases.
Type #5: Closed mortgages
Closed mortgages are an agreement that cannot be prepaid in any way, refinanced, or renegotiated before maturing. Though closed mortgages may contain specific terms which as they’re fulfilled may allow for renegotiating under certain conditions.
Type #6: Open mortgages
Open mortgages are one of the more flexible types of mortgages, allowing a borrower to repay what’s owing on a mortgage at any time without penalty. Due to the flexible nature, open mortgages carry shorter terms though some can be variable rate and on longer terms.
Please note that open mortgages have higher mortgage rates than closed mortgages with identical terms.
Type #7: Adjustable rate mortgages
Adjustable rate mortgages, otherwise referred to as ‘variable rate mortgages’, are where a mortgage’s interest rate fluctuates according to market conditions. Throughout the loan term, rates will change in accordance with a third party’s index rate and the lender’s margin.
For these types of mortgages, the interest rate changes can occur every six months to a year and are usually capped on a maximum.
Type #8: Hybrid adjustable rate mortgages
Though rare, hybrid ARMs are broken into periods usually with an initial fixed rate for a specific period of time. A common hybrid mortgage like this is 3/1 – three years on fixed interest followed by variable interest rates going forward. Another option is a 5/1 wherein the fixed rate period is five years.
Type #9: Balloon mortgages
Balloon mortgages are usually set on a shorter term. Across that term, a homeowner pays very little. In some cases, all they pay is the interest owing. Then, at the end of said term – which is typically 7-12 years – the entire balance is due. These types of mortgages are not generally recommended and is a very risky proposition for most borrowers.
Type #10: Home equity line of credit
A home equity line of credit, or HELOC, is a line of credit secured by your home. On a HELOC, a homeowner can borrow money up to their credit limit, usually defined as a percentage of a home’s value.
A home equity line of credit here is essentially an option to borrow on your home’s equity. A HELOC may also be an option for some as an alternative to a mortgage.
Type #11: Second mortgages
You may have heard the time ‘second mortgage’ before. When you already have a home with equity built in, you can take out a home equity loan aka a second mortgage. This is almost identical to a home equity line of credit. It is the same dynamic.
The loan under a second mortgage is revolving and based on the equity in your home. A second mortgage has a higher interest rate than your first mortgage but they can be an option if you need to finance a renovation or have other expenses to cover.
Type #12: Reverse mortgages
Reverse mortgages are a great way for seniors to access the value they’ve invested in their properties. A reverse mortgage is a loan that is withdrawn as one lump sum with monthly payments, or as a line of credit. No payments are required on a reverse mortgage.
Instead, the lender puts a lien on the home for the amount owed which is to be collected on the death of the borrower or should they move out of the house. Reverse mortgages essentially give your household back to the lender in exchange for returning to you the value you’ve put in. For homeowners that do not intend to move, they may wish to acquire a reverse mortgage in their senior years.