Types of Mortgages Available
This section consists of two parts.
The first part deals with the difference between a conventional mortgage and a high-ratio mortgage.
Part two deals with the different types of mortgages available. However, these are fairly generic explanations - just as there are many different lending institutions, so there are almost as many different varieties of mortgages available. This is another good reason to consult a mortgage broker. Depending on your situation, one type of mortgage may be better for your circumstance than another.
CONVENTIONAL MORTGAGE
If you have at least 20% of the purchase price (or appraised value if this is lower than the purchase price) as a downpayment, you can apply for a conventional mortgage.
Some lenders will require CMHC insurance because of the property's location or type, even though you have 25% or more equity.
HIGH-RATIO MORTGAGE
We do also have a 0% down option, which is essentially a cash-back mortgage. In a nutshell, you pay the posted rate (not the discounted rate), and in return for the higher interest rate, the bank agrees to give BACK a some money, hence a "cashback". Either myself or my mortgage broker will explain this one personally, but it's a FANTASTIC option for many purchasers.
If you have between 5% and 20% of the purchase price as your down payment, you can apply for a high-ratio mortgage. Usually, these have to be insured through CMHC (Canada Mortgage and Housing Corporation) or GE/Genworth (GE Capital). These are mortgage insurance companies. Purchasing insurance is a common way of qualifying for a mortgage when you have less than 20% equity. The insurance premium is charged only once (per mortgage) when the mortgage funds are advanced. You can pay the premium yourself, but most people choose to add the funds on top of the mortgage.
| Loan-to-Value | Premium on Total Loan | Premium on Increase to Loan Amount for Portability and Refinance | ||
|---|---|---|---|---|
| Standard Premium | Self-Employed without 3rd Party Income Validation | Standard Premium | Self-Employed without 3rd Party Income Validation** | |
| Up to and including 65% | 0.50% | 0.80% | 0.50% | 1.50% |
| Up to and including 75% | 0.65% | 1.00% | 2.25% | 2.60% |
| Up to and including 80% | 1.00% | 1.64% | 2.75% | 3.85% |
| Up to and including 85% | 1.75% | 2.90% | 3.50% | 5.50% |
| Up to and including 90% | 2.00% | 4.75% | 4.25% | 7.00%* |
| Up to and including 95% | 2.75% | N/A | 4.25%* | * |
| 90.01% to 95% - Non-Traditional Down Payment*** |
2.90% | N/A | * | N/A |
| Extended Amortization Surcharges | ||||
| Greater than 25 years, up to and including 30 years: 0.20% Greater than 30 years, up to and including 35 years: 0.40% |
||||
Please note: Insurance premiums are higher when there is more than one advance. This usually happens if you are building your house or having it built for you. Check with your mortgage broker to learn what the applicable premiums will be.
The insurance premium is calculated by multiplying the mortgage amount needed by the applicable percentage.
For example:
If the purchase price is $112,000 and the required mortgage is $100,000. You divide 100,000 by 112,000. This equals 89.29%.Looking at the above chart - the premium is 2.0% when the lending ratio is 89.29%.
The next step is to multiply the mortgage amount by the insurance premium. Using our example this means $100,000 X 2.0% = $2,000. Your actual mortgage loan will therefore be $102,000.
CMHC's 5% DOWNPAYMENT PROGRAM was originally for first-time homeowners, but was expanded in May 1998 and is now available to all purchasers (principal residence only) who meet the normal requirements.
If the property is a duplex (and you are buying both sides), with one side being owner-occupied, the minimum downpayment is 7.5%.
Mortgage brokers and lenders must verify that the borrower has a 5% downpayment and 1.5% of the purchase price to cover closing costs. The only exception to the 1.5% is when the purchaser qualifies for an exemption of the Land Transfer Tax (Ont.) or Property Transfer Tax (B.C.) or similar provincial tax exemption. In Alberta, where we have no transfer tax (only registration costs), the lenders often waive this condition. In these cases, the mortgage broker or lender must ensure that there are sufficient funds available to cover all remaining closing costs. It is also possible to finance the closing costs over 12 months as long as the payments fit inside the 40% TDS ratio.
OPEN MORTGAGES
An open mortgage allows you to pay off part or the entire mortgage at any time without penalties. Open mortgages usually have short terms of six months or one year. The interest rates are higher than those for closed mortgages with similar terms.
VARIABLE RATE MORTGAGES / ARM (ADJUSTABLE RATE MORTGAGES)
At the start of a variable rate mortgage, the lender will calculate a mortgage payment that includes principal & interest. For the term of the mortgage, your payments usually do not change. However, as the prime rate changes so will your mortgage rate.
If interest rates are dropping, less of each payment will go toward interest and more will go toward principal. If interest rates rise, more of your payment will be interest and less money will be reducing your principal.
Some of these mortgages are completely open (you can pay off all or part of your mortgage at any time without penalties). Others that offer a 'prime minus' interest rate (e.g. prime - 0.375%) may charge a penalty.
The interest rate on most variable-rate mortgages is compounded monthly.
CAPPED RATE MORTGAGES
These are variable rate mortgages that the lending institution has rate 'capped'. In other words, the rate will fluctuate with prime, but the institution guarantees that you will not pay more than a certain interest rate, set by them.
These mortgages often have a penalty for early 'payment in full' and are often not portable.
CLOSED MORTGAGES / FIXED RATE MORTGAGES
The expression 'closed mortgage' originates from the 1980s when this type of mortgage was literally 'closed'. You contracted to the lender to make your payments for the term chosen, you could not pay anything additional, nor could you pay off the entire amount for any reason except the sale of your property.
These days, there are many ways to pay down your mortgage principal quicker, though the name 'closed' mortgage still remains. See pre-payment options for ways to pay off your mortgage quicker.
Fixed-rate mortgages are the most popular type of mortgage. You benefit from the security of locking in your mortgage interest rate, for lengths of time ranging from 3 months up to 25 years. The rates are slightly lower than for an open mortgage for the same term.
If you think interest rates could rise, you may want to choose a longer-term, such as a 5 or 10-year term. If you think that rates are going lower, you may want to gamble on a shorter length of time. Discuss this with your mortgage broker.
The major lending institutions have different pre-payment options allowed under their contracts. These options allow you to pay off your mortgage faster. It is also possible to pay off most closed mortgages prior to the end of the term or pay down a portion of the balance owing. However, lenders charge penalties for doing so.
Please note that some lending institutions will not give any pre-payment options. It is wise to find out what options are available before entering into any mortgage contract.
CONVERTIBLE MORTGAGE
These are fixed-rate mortgages for terms of 6 months or 1 year. Not all lending institutions offer convertible mortgages. With a convertible rate mortgage, you can lock into a longer-term during the current term of your mortgage without penalty - but only with the same lender. For example, if after a couple of months you hear that interest rates are going to increase, you may change to a longer-term mortgage such as the 5-year term.
REVERSE MORTGAGE
CHIP - Canadian Home Income Plan is the name of the company providing reverse mortgages in Canada.
A reverse mortgage allows homeowners to convert equity in their homes into cash, without selling the property or having to make monthly payments.
To qualify, homeowners must be at least 62 years old, have significant equity in their property and live in B.C. or Ontario.
The amount that can be borrowed depends on the homeowner's age. Reverse mortgages are for between 10% and 40% of the appraised value of the home. The older the homeowners, the more they can borrow.
The homeowner retains ownership and possession of the house. The lending company registers a reverse mortgage against the property. At death, or when the house is sold, the loan and the accrued interest must be repaid.
The biggest disadvantage to reverse mortgages is that the interest keeps building on the amount of money borrowed (hence the maximum 40% loan). This means that if you borrow $50,000 this year and your interest bill is $5,000, next year your interest will be charged on $55,000 and so on. The longer the loan is in place, the greater the interest bill that has to be paid.
It is possible that when the house is sold, 100% of the proceeds from the sale may be required to pay off a loan.
If the homeowner dies the estate will have to pay off the loan and the accrued interest. This may wipe out any inheritance for the homeowner's heirs.
An alternative is to establish an equity credit line. This allows you to take funds only as you need them, thereby owing the least interest possible, with no surprises. Consult with a financial advisor for more alternatives.