Mortgages are a type of loan that is used to finance the purchase of a property. In Canada, there are several types of mortgages available to borrowers. Each type has its own advantages and disadvantages, so it is important to understand the different mortgage types before making a decision.
Fixed Rate Mortgage: A fixed rate mortgage has an interest rate that is set for the entire duration of the loan. This type of mortgage can provide borrowers with the stability of knowing that their monthly payments will not increase over the life of the loan. The disadvantage of a fixed rate mortgage is that the interest rate is usually higher than other types of mortgages.
Variable Rate Mortgage: A variable rate mortgage has an interest rate that can fluctuate depending on the Bank of Canada’s prime rate. With this type of mortgage, borrowers may benefit from a lower interest rate initially, but the rate can increase over the life of the loan. The advantage is that borrowers can take advantage of a lower interest rate if the prime rate decreases.
High Ratio Mortgage: A high ratio mortgage is a type of loan that is used when borrowers do not have a down payment of at least 20% of the purchase price of the property. In Canada, high ratio mortgages must be insured by either the Canada Mortgage and Housing Corporation (CMHC) or Genworth Financial. The advantage of this type of mortgage is that it allows borrowers to purchase a property without a large down payment. The disadvantage is that there are additional fees associated with this type of loan.
Open Mortgage: An open mortgage is one that does not have a fixed term and can be prepaid, refinanced, or renegotiated at any time without penalty. The advantage of an open mortgage is that it gives borrowers the flexibility to make changes to the loan if their financial situation changes. The disadvantage is that the interest rate is usually higher than other types of mortgages.
Closed Mortgage: A closed mortgage is a type of loan that has a fixed term and is not allowed to be prepaid, refinanced, or renegotiated without penalty. The advantage of a closed mortgage is that it offers borrowers the security of knowing that their monthly payments will not change over the life of the loan. The disadvantage is that the interest rate is usually higher than other types of mortgages.
Home Equity Line of Credit (HELOC): A HELOC is a type of loan that is secured by the equity in a borrower’s home. This type of loan can be used for a variety of purposes, such as home renovations or debt consolidation. The advantage of a HELOC is that it can provide borrowers with access to a large sum of money. The disadvantage is that it is a variable rate loan, so the interest rate can fluctuate over the life of the loan.
No matter which type of mortgage you choose, it is important to shop around and compare different lenders to find the best deal. It is also important to get advice from a qualified financial professional to ensure that you make the right decision.