Before you sit down with a lender, spend some time considering what type of mortgage you want. There are many mortgage products on the Canadian market, and we’ve listed the standard mortgage options you’re likely to encounter as you set out to buy your first home. Read this list, and then consider what will work best for you.
Conventional Mortgage
To get a conventional mortgage, you must have a 20 percent down payment. It is a traditional, straightforward mortgage.
High-Ratio Mortgage
To get a high-ratio mortgage, you must have a 5 percent down payment. If you take out a high-ratio mortgage, you must also buy mortgage default insurance, which protects the lender if you can’t make your payments. Insurance premiums can be as high as 4.5 percent of the purchase price, and you must also pay provincial sales tax on your premiums. For more details on mortgage default insurance, see Chapter 3.
In the fall of 2016, the federal government instituted new rules to make sure Canadians will be able to make their mortgage payments when interest rates start rising. When you apply for a high-ratio mortgage, the lender will apply a “mortgage rate stress test.” Even if the bank is offering you a very low mortgage rate, you must qualify for your mortgage at the Bank of Canada’s conventional five-year fixed posted rate, which is higher. You can learn more about the 2018 stress test here.
Portable Mortgage
If you choose a portable mortgage, you can take it with you when you move, though the government requires you to re-qualify each time you move. This can be a good option if you’ve secured a low interest rate and later decide to move. Be sure to read the fine print.
Assumable Mortgage
If you take out an assumable mortgage and later decide to sell your home, the buyers can take over (assume) the mortgage. An assumable mortgage can be a selling feature if you’ve locked in a low interest rate and current posted rates are higher. For this reason, assumable mortgages are popular when interest rates are rising. These types of mortgages can also be helpful if you decide to sell mid-way through your mortgage term; if your buyer assumes your mortgage, you can significantly reduce or even eliminate the fees associated with breaking a mortgage.
Vendor Take-Back Mortgage
A vendor take-back mortgage allows the seller to help the buyer by loaning some or all of the mortgage financing required to purchase the property. In some cases, the seller will also pay closing costs, such as land transfer taxes or appraisal and survey fees.
These types of mortgages are practically unheard of when markets are stable and interest rates are low. In a buyer’s market, or when interest rates are high, sellers will offer VTB mortgages at lower rates to entice buyers.
Blanket Mortgage
A blanket mortgage covers at least two pieces of real estate, and possibly many more. This type of mortgage is typically used by developers and investors, so you’re unlikely to need one as a first-time home buyer. It is possible, however, that a co-op or co-ownership building has a blanket mortgage, and that you’ll be entering into this agreement should you choose to buy into that building. Be sure to consult with your lawyer and an accountant if you find yourself considering a home with a blanket mortgage.
Fixed Rate Mortgage
As the name suggests, the interest rate on a fixed-rate mortgage is “fixed” for a term, usually between one and five years. Your payments will remain the same for the duration of the term, with the same split between principal and interest. Your rate is locked in for the term, so you’re protected if interest rates go up. In exchange for this stability and predictability, the interest rate is slightly higher than other mortgage options. Most Canadians choose fixed-rate mortgages.
Variable Rate Mortgage
The interest rate on a variable-rate mortgage changes based on the prime rate, for a term usually ranging between one and five years. Your payments will remain the same for the duration of the term, but the split between principal and interest will change. When interest rates are low, more of your payment goes to the principal; when interest rates are high, more of your money goes to interest. Variable-rate mortgages typically feature a lower interest rate, but in exchange for the lower interest rate you give up a measure of stability and predictability.
Adjustable Rate Mortgage
The interest rate on an adjustable-rate mortgage changes with prime, just like a variable-rate mortgage. However, with an adjustable-rate mortgage, your payment amount will change along with your interest rate. This means that when interest rates are low, your mortgage payment will stay low; if interest rates rise, your mortgage will go up. Interest rates on adjustable-rate mortgages are typically lower than those on fixed-rate mortgages. These types of mortgages are best for people who have lots of flexibility in their budget and are comfortable with sudden mortgage payment increases.
Convertible Mortgage
A convertible mortgage allows you to transition from a variable-rate or adjustable-rate mortgage to a fixed-rate mortgage, typically without paying any fees. Some convertible mortgages allow you to transition from a short fixed-rate mortgage into a longer fixed-rate mortgage. These types of mortgages allow you to take advantage of lower rates, but also convert and “lock in” when interest rates start to rise.
Cash-Back Mortgage
If you secure a cash-back mortgage, you’ll get extra money from the bank that can help with closing costs, pay the moving company and maybe even finance some renovations in your new home. However, these mortgages have a steep price tag. You’ll pay a higher interest rate, which could cost you tens of thousands of dollars over the life of the mortgage. Most, if not all, cash-back mortgages also have clawback features that will cost you dearly when you sell your home. Be sure to read the fine print.
Open Mortgage
An open mortgage offers a great deal of flexibility. You can make large lump-sum payments, or you can pay it off entirely at any time. In exchange for this flexibility, you will typically pay a higher interest rate. However, an open mortgage can be a good option if you are expecting an inheritance or another substantial sum of money in the near future.
Closed Mortgage
Most first-time home buyers will secure a closed mortgage, which offers lower interest rates and less flexibility. Depending on the terms of your mortgage, you will only be able to repay a certain amount per year over and above your set payments. If you come into money and choose to pay your mortgage in full, you will pay a penalty for doing so.