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Mortgage
Types & Rates
The four main types of mortgages
offered by lenders in Canada are Closed, Open, Fixed, and Variable
rate. Many lenders also offer products that combine elements of
various mortgage types. (i.e. additional payments, blended rates,
rate discounts and cash back. See your broker or lender for details
on these.)
CLOSED MORTGAGE
Keeps payments unchanged for the duration of the loan period. It
provides payment stability but penalizes a mortgager who wishes to
terminate the mortgage earlier. Terms can be for six months, one,
three, five, seven, ten, fifteen, and twenty years, with the five year
term being the most common. Interest rates generally rise with the
length of the mortgage.
OPEN MORTGAGE
Allows flexibility of prepayment
VARIABLE RATE MORTGAGE
Offers the advantage of lower rates if mortgage rates decline.
On the other hand, it exposes the mortgager to the risk that monthly
payments will go up if mortgage rates rise.
FIXED RATE MORTGAGE
Keeps the mortgage rate the same throughout the life of the mortgage
even if rates rise. if rates go down, a fixed rate mortgage may
prove to be more expensive than a variable rate one.
SHORT TERM
Mortgage is usually for two years or less. A LONG TERM
mortgage is generally for three years or more. Short-term mortgages
are appropriate when someone believes interest rates will drop come
renewal time. Long-term mortgages are suitable when current rates
are reasonable and borrowers want the security of budgeting for the
future. This may be important for first time homebuyers. The
key in choosing between short and long terms is to feel comfortable with
your mortgage payments.
CONVENTIONAL MORTGAGE
A loan for no more than 75% of the appraised value or purchase price
of the property. Whichever is less. The remaining amount comes from
the borrower's own resources and is known as the Down Payment.
The conventional requirements for a variable interest rate mortgage are
somewhat different, with the loan amount not exceeding 70% of the
appraised value or purchase price of the home, whichever is less.
HIGH RATIO MORTGAGE
Used for loans that exceed conventional mortgage lending guidelines.
These mortgages are granted under the National Housing Act (NHA)
and must, by law be insured against default through Canada Mortgage and
Housing Corporation (CHMC). The borrower will have to pay the
insurance premium, which can range from 0.50% to 3.75% of the total
mortgage amount. Typically, the insurance premium is added to the
principal amount of the mortgage. With a high ration mortgage,
people can purchase a home with as little as 5% down payment.
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