Choosing The Right Mortgage For You

by : John Carle & Sharon Gregresh

This article will help you understand the differences between a variety of mortgage options. There are many different mortgage products offered by the various lending institutions in Canada, so you may not know what features to look for.

As you'll see, each type of mortgage has slightly different features which appeal to a variety of different preferences. For example, some home buyers take comfort in knowing that the amount of their mortgage payments will be the same throughout the entire term of their mortgage. Other home buyers may be willing to accept some fluctuation in the amount of their mortgage payments in exchange for the potential long-term savings or the change to pay off their mortgage faster.

The right mortgage for you in the one that best matches your overall comfort level and fits with your income and lifestyle.

Conventional or High Ratio

A conventional mortgage is a loan for no more than 75% of the appraised value or purchase price of the property, whichever is less. The remaining amount required for a purchase (25%) comes from your resources and is referred to as the down payment. If you have to borrow more than 75% of the money you need, you'll be applying for what is called a 'High-Ratio Mortgage'. Here's how it works:

You must have at least a 5% down payment when you buy a home. Any down payment between 5% and 24% is considered a high-ratio mortgage, and the mortgage must be insured by the Canadian Mortgage and Housing Corporation (CMHC) or GE Capital Mortgage Insurance Company (GEMICO). The insurer will charge a fee for this insurance. The amount of the fee will depend on the amount you are borrowing and the percentage of your own down payment. Typical fees range from 0.5% to 3.75% of the value of your home. This amount can be paid up front or added to the principal amount of your mortgage. A Mortgage Specialist or Mortgage Broker can help you determine the exact amount of the fee.

Fixed Rate or Variable Rate Mortgage

When you take out a fixed-rate mortgage, your interest rate will never change throughout the entire term of your mortgage. As a result, you will always know exactly how much your mortgage payments will be and how much of your mortgage will be paid off at the end of your term.

With a variable rate mortgage, your rate will be set in relation to the lending institution's Mortgage Prime Rate at the beginning of each month. In other words, it will vary from month to month. Historically, variable-rate mortgages have tended to cost less than fixed-rate mortgages when interest rates are fairly stable. When rates change, your payment amount remains the same. However, the amount that is applied toward interest and principal will change depending upon the interest rate that month.

If interest rates drop, more of your mortgage payment is applied to the principal balance owing. The can help pay off your mortgage faster. However, if interest rates rise, more of your monthly payment is taken up by your interest payment.

Short-term or Long-term

The 'term' is the length of the current mortgage agreement. A mortgage typically has a term of six months to 5 years. Usually, the shorter the term, the lower the interest rate.

A 'short-term' mortgage is usually for two years of less. A 'long-term' mortgage is generally for three years or more. Short-term mortgages are appropriate for buyers who believe interest rates will drop at renewal time. Long-term mortgages are suitable when current rates are reasonable and borrowers want the security of budgeting for the future. The key to choosing between short and long term is to feel comfortable with your mortgage payments.

After a term expires, the balance of the principal owing on the mortgage can be repaid, or a new mortgage agreement can be established at the then-current rates.

Open or Closed

Open mortgages can be paid off at any time without penalty and are usually negotiated for very short terms, They are suited to homeowners who are planning to sell in the near future or those who want the flexibility to make large, lump-sum payments before the end of the term.

A closed mortgage has a locked-in interest rate for the full term of the mortgage. Most first-time home buyers prefer a closed mortgage because they want to enjoy the comfort of steady, predictable mortgage payments. If you want to re-negotiate your interest rate, or pay off the balance, you will need to wait until the maturity date or pay a penalty.