Explore 10 different mortgage types in Canada, including fixed-rate, variable-rate, high-ratio, conventional, and more. Everything you need to make an informed mortgage decision.
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In Canada, there are several types of mortgages available to borrowers, each with its unique features and benefits.
The four primary mortgage types are Conventional Mortgages, High-Ratio Mortgages, Fixed-Rate Mortgages, and Variable-Rate Mortgages.
Conventional Mortgages require a minimum 20% down payment, while High-Ratio Mortgages allow borrowers to make a down payment of less than 20% but require default mortgage insurance.
Fixed-Rate Mortgages have a set interest rate for the entire term of the loan, while the interest rate on Variable-Rate Mortgages fluctuates with changes in the prime rate.
In addition to these four primary mortgage types, there are also specialized mortgage programs designed to meet the unique needs of specific groups of borrowers, such as First-Time Homebuyer Programs, Bad Credit Mortgages, and Rental Property Mortgages.
We explore the different types of mortgages in Canada, including the benefits and drawbacks of each.
Whether you’re a first-time homebuyer, looking to renovate your home, or are a senior looking to access the equity in your home, learn what mortgage type is right for you.
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There are four primary types of mortgages available in Canada – conventional mortgages, high-ratio mortgages, fixed-rate mortgages, and variable-rate mortgages.
Understanding the differences between these four types of mortgages can help borrowers choose the right option for their needs and financial situation.
High-Ratio Mortgage (Default Insured Mortgages) allows you to make a down payment of less than 20% of the purchase price.
This mortgage type is often used by first-time homebuyers or those who don’t have a large down payment saved up for a Conventional Mortgage. This mortgage type’s low down payment requirement makes homeownership more accessible and affordable.
High-Ratio Mortgages must be insured against default, which CMHC, Sangen, and Canada Guaranty provide.
You don’t need to apply for the insurance separately; your lender will apply for coverage on your behalf. However, you are responsible for the cost of the insurance, which is typically added to the mortgage loan and amortized for the entire loan life.
Despite the benefits of High-Ratio Mortgages, there are some drawbacks to consider.
A primary disadvantage of High-Ratio Mortgages is the added cost of default insurance coverage, as the risk of default is higher for borrowers with a smaller down payment.
The fee for default insurance protection is typically added to the mortgage balance and paid off over the life of the loan.
Also, High-Ratio Mortgages come with an amortization limit of 25 years. This limit can affect your ability to qualify and your monthly mortgage payment compared to longer amortization mortgages.
Conventional Mortgages are limited to a maximum of 80% of the property value, which means borrowers must make a minimum down payment of 20% of the house value to qualify for this mortgage type.
While Conventional Mortgages require a larger down payment compared to High-Ratio Mortgages, they may offer more flexibility and fewer restrictions. Conventional Mortgages generally have more relaxed qualification requirements than High-Ratio Mortgages, as lenders may be more willing to work with borrowers with a lower credit score or higher levels of debt due to the larger down payment, which can offset some of the risks.
Additionally, Conventional Mortgages do not require default mortgage insurance, which can save borrowers significant costs over the life of the loan.
It’s important to note that several mortgage programs, including Rental Mortgages, Bad Credit Mortgages, High-Value Property Mortgages (for properties valued at $1 million and over), Private Mortgages, and Non-Confirmable Income Mortgages, are only offered as Conventional Mortgages.
This further emphasizes the importance of understanding the different types of mortgages available to choose the right option for one’s needs and financial situation.
Fixed-Rate Mortgage is another popular type in Canada. The interest rates for this mortgage type are fixed and do not change for the entire life of the loan, even if the market rate moves up and down.
The fixed interest rate allows you to know exactly how much you will pay in interest each month, making budgeting and financial planning much easier.
In General, Fixed-Rate Mortgages provide stability and predictability, which can be particularly beneficial if you prefer a consistent monthly mortgage payment.
On the other hand, a disadvantage of fixed-rate mortgages is their often higher interest rate than adjustable-rate mortgages. The higher interest rate may end up costing you more in interest over the life of the loan than you would with an adjustable-rate mortgage.
It’s also worth noting that there may be penalties for breaking a fixed-rate mortgage before the end of the term, which can be quite costly.
These are mortgages with variable interest rates. The interest rates of these mortgages changed in tandem with the prime rate.
The prime rate is the interest rate banks charge their most creditworthy borrowers.
When the prime rate changes, so do the interest rate on variable-rate mortgages, which means you may pay more or less interest depending on market conditions. One of the key benefits of Variable-Rate Mortgages is that they often come with a lower initial interest rate than Fixed-Rate Mortgages.
This can make them an attractive option for those who want to save money on their monthly mortgage payments.
However, it’s important to remember that the interest rate on Variable-Rate Mortgages can increase over time, potentially resulting in higher payments in the long run.
You should carefully consider your financial situation and ability to handle potential increases in interest rates before choosing a Variable-Rate Mortgage.
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In addition to the above four primary mortgage types offered in Canada, specific mortgage programs are designed for borrowers with unique needs, credit, and financial situations.
Below, we will review these mortgage programs or types, which include first-time homebuyer mortgages, bad credit mortgages, rental property mortgages, and more.
First-Time Homebuyer Programs are mortgage programs designed specifically for individuals buying a home for the first time. These programs are intended to help first-time buyers overcome the financial hurdles that can make it difficult to purchase a home and enter the housing market.
One of the primary benefits of First-Time Homebuyer Programs is that they often offer lower down payment requirements compared to traditional mortgages. This is especially helpful for first-time buyers with insufficient savings or equity in other assets.
With a lower down payment requirement, you can more easily afford to purchase a home and start building equity in real estate. In addition, most First-Time Homebuyer Programs offer access to specialized financing options, such as low-interest loans or grants, and educational resources to help you better understand the home-buying process and make informed decisions.
Not all First-Time Homebuyer Programs are the same, and the specific benefits and requirements can vary depending on the program and the lender. Some programs may have income restrictions or other eligibility requirements, so it’s important to research or talk with an approvU Mortgage Expert to ensure you understand the program details you’re considering before applying.
This mortgage type allows you to borrow against the equity you’ve built up in your home.
Equity is the difference between the current value of your home and the outstanding balance of the mortgages and other debts secured against the property. As you pay down your mortgage or your house value increases over time, the equity in your home grows.
Using Home Equity Loan, you can use the equity in your home to finance expenses such as home renovations, debt consolidation, or other major purchases. The amount you can borrow depends on your home equity value and the specific policies and requirements of the mortgage lender you choose.
However, at a minimum, the existing mortgage and the new loan cannot be more than 80% of your house value. Home Equity Loans come with several benefits. They typically offer lower interest rates than other consumer debt forms, such as credit cards or personal loans.
This makes them attractive for homeowners looking to consolidate high-interest debt or finance large expenses.
Additionally, the interest paid on Home Equity Loans may be tax-deductible if the funds are used to improve the house. However, taking out a Home Equity Loan has some risks, including the possibility of foreclosure if payments cannot be made. In addition, taking out a Home Equity Loan can reduce the home’s equity, which could impact your ability to sell the home or refinance the existing mortgage.
These mortgages are designed for seniors who own their own homes. It allows homeowners 55 or older to access home equity without selling or making monthly payments.
A reverse mortgage can be helpful for seniors who want to access their home equity to supplement their retirement income—providing them with an additional source of income to cover living expenses and unexpected costs.
Instead of having to make monthly payments, the loan is paid off when the homeowner sells the property or passes away. At that point, the loan is typically repaid from the sale proceeds, and any remaining equity in the home goes to the homeowner or their heirs.
It’s essential to remember that reverse mortgages also come with some risks. As interest accumulates over time, the loan amount can increase significantly over the years. This means that the equity in your house may decrease, which could affect your ability to leave an inheritance for your heirs.
In addition, you must continue to pay property taxes, homeowners insurance, and maintenance costs on the property. With limited sources of income, you could easily default on the mortgage if these costs become too burdensome.
If you have a poor credit history or score, you may consider a Bad Credit Mortgage. This mortgage type can be an option for borrowers who have been turned down for traditional mortgages due to factors such as missed payments, high levels of debt, or a history of bankruptcy or foreclosure.
It’s important to note that Bad Credit Mortgages come with much higher interest rates than conventional mortgages. The interest rates on bad credit mortgages could be several percentage points higher than mortgages offered by traditional lenders like banks and credit unions.
Other costs like lender and broker fees are included in this mortgage type. Overall, a bad credit mortgage helps individuals who may not otherwise be able to access a mortgage at a high cost. Therefore, given its high costs, you should assess the pros and cons before starting this mortgage type.
These are mortgages to buy rental or investment properties.
If you’re looking to buy a rental or investment property, a Rental Property Mortgage might be the right choice. This type of mortgage can finance a range of rental properties, from single-family homes to multi-unit apartment buildings.
However, it’s important to note that lenders typically require a larger down payment for rental properties than primary residences. In most cases, you can expect to put down at least 20% of the purchase price, and some lenders may require more.
The number of units in the rental property is another crucial factor to consider when applying for a Rental Property Mortgage. Lenders may have specific requirements for the number of units in a rental property, which can affect the terms and conditions of your mortgage. For example, properties with more than four units may be considered commercial properties and require a different type of mortgage.
Additionally, lenders may have more stringent underwriting criteria and require higher down payments for properties with multiple units, as these properties may be considered higher-risk investments.
Be sure to review the requirements of any Rental Property Mortgage you’re considering to ensure you meet the lender’s criteria.
Private Mortgages are a type of mortgage offered by private lenders, which can be individuals, a group of people, a family member, or a business owner.
Private Mortgages are often used by individuals who cannot qualify for traditional or bad credit mortgages from institutional lenders due to factors such as their credit, income, or property.
Private lenders are generally more willing to take on higher-risk borrowers, but this often comes with higher interest rates and less favourable terms. It’s important to note that Private Mortgages are both expensive in the short and long run and should only be considered a last resort.
They come with higher interest rates, high lender and broker fees, and overall high closing costs compared to traditional mortgages from a bank or credit union. As a borrower, it’s essential to carefully consider all your options before deciding on a Private Mortgage.
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In conclusion, the options for house and mortgage financing in Canada are diverse and offer a range of benefits for different types of borrowers.
Whether you’re looking for a low down payment, a fixed interest rate, or a way to access the equity in your home, there’s a financing option to meet your needs.
It’s essential to take the time to understand the different types of financing available and to carefully consider the terms and conditions of each before making a decision. With the right financing, you’ll be well on your way to becoming a proud homeowner in Canada.