Are you planning to buy a home in Canada? With numerous mortgage options available, it can be overwhelming to decide which one is right for you. In this comprehensive guide, you'll learn about the different types of mortgages in Canada, their key features, and how to choose the best one based on your financial situation and goals. By understanding these options, you can make informed decisions and secure the best mortgage deal for your dream home.
Types of Mortgages in Canada: A Comprehensive Guide for Borrowers
Fixed-Rate Mortgages
A fixed-rate mortgage is a popular choice among Canadian homebuyers. With this type of mortgage, you lock in an interest rate for the entire term of the loan, typically ranging from 1 to 10 years.This means that your monthly mortgage payments remain consistent throughout the term, making it easier to budget and plan for the future.
Key Features:
- Interest rate remains constant throughout the term
- Provides stability and predictability in monthly payments
- Terms typically range from 1 to 10 years
Variable-Rate Mortgages
Unlike fixed-rate mortgages, variable-rate mortgages have interest rates that fluctuate based on the lender's prime rate, which is influenced by the Bank of Canada's benchmark rate. If the prime rate changes, your mortgage interest rate and monthly payment will also change.This type of mortgage can be beneficial when interest rates are declining, but it does come with some level of risk if rates rise.
Key Features:
- Interest rate varies with changes in the prime rate
- Monthly payments may change due to fluctuations in interest rates
- Can potentially save money if interest rates drop during the term
Adjustable-Rate Mortgages (ARM)
An adjustable-rate mortgage (ARM) is a variation of a variable-rate mortgage. With an ARM, your interest rate will change periodically based on a pre-determined formula.However, your monthly payment remains the same. If the interest rate increases, more of your payment will go toward interest, and if it decreases, more will go toward the principal balance.
Key Features:
- Interest rate adjusts periodically based on a pre-determined formula
- Monthly payment remains consistent, but the allocation of principal and interest may vary
- Offers some stability in payment amounts while still benefiting from potential interest rate drops
Convertible Mortgages
A convertible mortgage offers flexibility by allowing you to switch from a variable-rate mortgage to a fixed-rate mortgage during the term without incurring penalties.This can be advantageous if you anticipate that interest rates will rise in the future and want to lock in a lower rate.
Key Features:
- Provides the option to switch from a variable-rate to a fixed-rate mortgage
- No penalties for conversion
- Offers a level of protection against rising interest rates
Hybrid Mortgages
Hybrid mortgages, also known as combination mortgages, allow you to split your mortgage into multiple portions with different interest rates and terms.This can provide a balance between the stability of fixed-rate mortgages and the potential savings of variable-rate mortgages.
Key Features:
- Combines fixed-rate and variable-rate portions within a single mortgage
- Offers a mix of stability and potential interest rate savings
- Customizable based on borrower's risk tolerance and financial goals
High Ratio Mortgages
A high ratio mortgage is a mortgage with a loan-to-value (LTV) ratio of more than 80%. This means that the borrower is putting down less than 20% of the home's purchase price as a down payment.High ratio mortgages require mortgage default insurance, which protects the lender in case of borrower default.
Key Features:
- Loan-to-value ratio greater than 80%
- Requires mortgage default insurance to protect the lender
- Enables borrowers with smaller down payments to purchase a home
Conventional Mortgages
Conventional mortgages, also known as low ratio mortgages, have a loan-to-value ratio of 80% or less. This means that the borrower is putting down at least 20% of the home's purchase price as a down payment. Since the risk to the lender is lower, mortgage default insurance is not required. Key Features:- Loan-to-value ratio of 80% or less
- No mortgage default insurance required
- Lower overall borrowing costs due to the absence of insurance premiums
Portable Mortgages
A portable mortgage allows you to transfer your existing mortgage terms, including the interest rate and remaining term, to a new property without incurring any penalties.This can be an attractive option if you're moving to a new home and want to avoid the costs and hassle associated with obtaining a new mortgage.
Key Features:
- Allows for the transfer of mortgage terms to a new property
- No penalties for transferring the mortgage
- Can save time and money when moving to a new home
Reverse Mortgages
Reverse mortgages are designed for homeowners aged 55 or older who have significant equity in their homes. With a reverse mortgage, you can borrow a portion of your home's equity without having to make regular monthly payments.Instead, the loan becomes due when you sell the home, move out, or pass away. This can provide financial flexibility for seniors who want to access the equity in their homes without selling or downsizing.
Key Features:
- Available to homeowners aged 55 or older
- No monthly payments required
- Loan becomes due upon the sale of the home, moving out, or passing away
Home Equity Lines of Credit (HELOC)
A home equity line of credit (HELOC) is a revolving line of credit secured by your home's equity. It allows you to borrow money as needed, up to a pre-approved limit, and make interest-only payments on the outstanding balance.While not a mortgage in the traditional sense, a HELOC can be an attractive option for financing home renovations, consolidating debt, or covering other large expenses.
Key Features:
- Secured by your home's equity
- Flexible borrowing up to a pre-approved limit
- Interest-only payments on the outstanding balance