Selecting the Right Mortgage Means Understanding Different Types of Mortgages & Interest Rates
When examining different types of mortgages and the best mortgage brokers in Toronto, you’ll want to consider both your short and long-term financial goals. When discussing the right options with your Dream Key Mortgage Agent, we’ll help you understand that the best product isn’t always the one which offers the lowest rate; but rather, a mortgage which can offer a complete package of terms, conditions, rates and fees that maximizes your ability to meet your financial goals, while protecting your best interest. Our dedicated process ensures that all our clients understand the fine print so you can be the expert when it comes to your own mortgage.
Different Types of Mortgages
A closed mortgage essentially means having a mortgage with a limit on pre-payments. Closed mortgages typically have prepayment options of up to 20% of the original mortgage amount. If you decide to pay out, renegotiate or refinance before the end of the term of a closed mortgage, prepayment costs will be applied.
A convertible mortgage is similar to a closed mortgage except it gives you the option of converting to a longer, closed mortgage at any time without paying a prepayment charge. With this option, you can generally make an annual prepayment of up to 10% of the original mortgage amount.
An open mortgage can be prepaid at any time throughout the term, either in full or in partial instalments without paying a prepayment or penalty charge. Open mortgages can provide flexibility until you are ready to lock into a closed term.
High-Ratio (Insured) Mortgage
A high-ratio mortgage refers to a mortgage in which the borrower has a down payment of less than 20% of the purchase price. It is important to note that these mortgages require mortgage default insurance either through CMHC, Genworth, or Canada Guarantee. When a down payment is between 5-19.99% of the purchase price, a mortgage insurance premium is incurred which can vary depending on the down payment. Property insurance premiums can be hefty, so it is important to discuss the right down payment amount with your Mortgage Broker before making an offer on a property.
Conventional (Uninsured) Mortgage
A conventional mortgage refers to a mortgage in which the borrower has a down payment of a minimum of 20%, with good credit and enough income, can qualify for an uninsured mortgage. Uninsured mortgages do not have the same premiums as Insured Mortgages so can often be the preferred choice for home buyers.
Different Types of Mortgages & Interest Rates
Changes to a bank’s Prime Rate are often described in terms of increases or decreases in “basis points”. A basis point is a unit of measure that represents 1/100th of one percent (0.01%). For example, if interest rates are increased by 50 basis points, this would equate to a 0.5% increase. The term basis point value simply denotes the change in the interest rate in relation to a basis point change.
Fixed Rate Mortgage
A fixed interest rate mortgage does not fluctuate during the mortgage term. This option allows your payments to remain consistent so you can anticipate exactly how much is owed each month and the amounts you will have paid off at the end of the term.
A variable interest rate will fluctuate with the prime rate throughout the mortgage term, impacting the amount of principal you pay off each month within your term. Variable interest rates are generally expressed in relation to the Prime Rate set by the Bank of Canada from time to time. It is important to note that the Prime Interest Rate may change at any time.
Understanding the Different Types of Mortgages
Open Mortgage Vs. Closed Mortgage
Closed Mortgages typically offer lower interest rates than Open Mortgages of the same term; but, Open Mortgages allow you to pay off as much as you want, at any time without penalty – which could save you a bundle in the long run.
Short Vs. Long Term Mortgages
The term of your mortgage is a significant consideration. Short-Term Mortgages are appropriate if it is likely that interest rates will be lower at renewal time, and Long-Term Mortgages are suitable if you are satisfied with your current rate and want the security of budgeting for the future. Long-Term Mortgages are often recommended and preferred for first-time homebuyers.
Variable Vs. Fixed Rate Mortgages
Identifying whether a Fixed or Variable Rate Mortgage is most suitable to your needs can vary based on many factors. While considering future market conditions is important, the truth is no one can accurately forecast what the future holds for the economy two to five years from now. So, assessing whether a fixed or variable rate mortgage is best requires an understanding of your personal financial plan and ability to handle market fluctuations. Fixed Rate Mortgages are based on the yield of Canadian Government Bonds and will not change during the term of your mortgage, creating a buffer from interest rate increases. Fixed Rate Mortgages allow you to budget precisely for the term you select for as many as 25 years. Interest rates in a Variable Rate Mortgage will fluctuate with market conditions, as determined by institutional prime lending rates, making this option higher risk, while opening up the opportunity to attain a potentially lower rate in the future. Book your free consultation with a Dream Mortgage Agent today to discuss which mortgage options work best for you!