Navigating through the various types of mortgages available to Canadians can help you secure a great mortgage. 67.8 percent of Canadian families own their principal residence, according to the latest data. It’s one of the highest homeownership rates of any country in the world.
For the vast majority of Canadian households, the dream of owning has become a reality as a result of the affordable mortgages available to homebuyers. Mortgage rates in Canada are among the friendliest you’ll find anywhere.
Besides affordable mortgage rates, Canadian homebuyers have the option to choose between a wide variety of home loan options. That means you can always find a mortgage solution that works for you based on your current circumstances.
Finding a mortgage to suit you is almost as important as finding the right home. First, finding a mortgage lender that has the type of mortgage product you are looking for. Each type of lender offers different types of mortgages.
In this comprehensive guide, we take a closer look at the main types of lenders in Canada and the type of mortgages they provide.
Types of Mortgages are Available to Canadians
‘A’ lenders are also commonly referred to as institutional lenders. These lenders constitute the big banks, credit unions, and monoline lenders. Generally, ‘A’ lenders control the biggest share of the market.
Here are some of the mortgages provided by these institutions.
A conventional mortgage is a type of mortgage that requires a minimum downpayment of 20 percent. The lender finances the remainder of the home purchase.
Conventional mortgages don’t usually require the consumer to purchase a mortgage default insurance. However, most lenders require the homebuyer to purchase a home insurance policy as a condition of the mortgage.
High Ratio Mortgages
Sometimes, consumers have less than the required 20 percent down payment for a mortgage. You can still get a mortgage, but you’ll be required to purchase mortgage default insurance. This type of mortgage is referred to as a high ratio mortgage, and your home’s loan-to-value will be more than 80 percent.
Open and Closed Mortgages
Open mortgages are home loans that you can pay off in full any time you choose without incurring a penalty. In contrast, closed loans restrict the consumer to paying a specific amount towards the mortgage per month.
Typically, open mortgages have higher rates than their closed counterparts. Your lender may still provide certain prepayment privileges when you take a closed loan, such as the ability to increase your payments.
Standard Mortgage Types Available to Canadians
A fixed-rate mortgage is a home loan whose rate remains the same throughout your mortgage term. In Canada, mortgage terms range from one to five years. Most Canadians opt for five-year fixed rates, as it means the mortgage rate is guaranteed to stay the same during that period.
Variable Rate Mortgages
As the name suggests, a variable rate mortgage is a mortgage whose rate can change during the mortgage term. Typically, rates change when your lender changes their prime rate, usually as a result of changes in the overnight lending rate of the Bank of Canada.
Generally, variable-rate mortgages have a lower rate than fixed mortgages. However, it’s important to note that rates can go up in the duration of your term. If you are risk-averse, a variable rate mortgage may not be the best option for you.
Unique Types of Mortgages Available to Canadians
For many institutional mortgages, portability is an important feature. This type of mortgage allows you to transfer the loan from one property to another without the risk of a penalty.
Note that some lenders don’t provide this type of mortgage, and those that do have a list of terms and conditions you need to adhere to. Before you sign any papers, take the time to understand these conditions.
Home Equity Line of Credit (HELOC)
A HELOC is a type of mortgage that allows a homeowner to borrow equity from their home. Borrowers can use the funds as they see fit, though most of them use a HELOC for home renovations and debt consolidation.
Canadian homeowners can borrow as much as 65 percent of their home’s value, as long as the HELOC and mortgage don’t exceed 80 percent of their home’s value.
A HELOC offers the benefit of flexible mortgage payments.
Some mortgages allow the borrower to receive cash upfront. These mortgages are known as cash-back mortgages.
You can use these funds towards anything except paying your down payment. Common uses include paying moving costs, purchasing furniture, and so on. These types of mortgages typically attract a higher interest rate.
A cash-back mortgage requires you to pay back the cash you receive on a prorated basis if you decide to break your mortgage in the course of the term.
Other Mortgages Available
The second major type of lenders Canadians can borrow from are known as alternative lenders. These lenders usually provide reverse mortgages.
A reverse mortgage is usually available to homeowners aged 55 years or older. Consumers borrow against their home’s equity, receiving the funds as a lump sum or monthly payments.
Reverse mortgages are most suitable for seniors on a fixed income. These consumers typically don’t qualify for a HELOC. Once the homeowner passes away or the property is sold, the amount for the reverse mortgage is payable to the mortgage institution.
Aspiring homeowners also have the option of working with private lenders. Some of the mortgage options you can expect from a private mortgage lender include:
Also known as bridge financing, a bridge mortgage refers to a temporary loan between the time you sell your current home and purchase a new one. This type of loan is especially helpful when the closing date of your new home is closer than that of your current home.
A homeowner can also opt to take another mortgage on their property after their initial one. This commonly referred to as a second mortgage. A second loan usually has a higher interest rate than a first loan.
Choose the Right Mortgage for You
It’s always the right time to aspire to be a Canadian homeowner. With so many types of mortgages in the market, a mortgage broker can deliver great options to you.
Are you searching for the ideal mortgage solution for your new home? Please give us a call today (1-877-383-1577) for some helpful tips or schedule a call with us online.