Types of Mortgages

Open mortgages can be paid off anytime without a penalty and provide the greatest amount of flexibility. A rate premium may be applied. For an Owner who is uncertain on how long they will need their mortgage, an open mortgage allows homeowners to pay off the balance without paying prepayment penalties. If you’re expecting an influx of cash to pay off your mortgage — like selling a business, selling a second home, rental property, or inheritance — an open mortgage may work best for you.

Closed mortgages can offer a lower overall rate. With a closed mortgage, you are required to make set payments at predetermined times. It’s good to be aware that this type of mortgage cannot be paid off early without facing a penalty. You must pay prepayment compensation if you want to pay more, renegotiate, refinance, or transfer your mortgage before the end of your term. A fixed rate closed mortgage is great for Owners who would like consistency for budgeting and may not be comfortable with a potentially fluctuating interest rate. Owners with a fixed budget who cannot afford interest rate increases that could occur on a variable rate mortgage often opt for this type of mortgage.

A variable rate mortgage can change because the mortgage rate is based on the prime rate. As the prime rate changes, it affects your mortgage rate. When this happens, the good news is that your monthly mortgage payment amount does not change. The only adjustment is the amount paid towards your mortgage principal and the amount paid towards interest. A variable rate mortgage is a good option for Owners who can afford a higher interest rate and those who would be comfortable knowing that the interest rate could increase or decrease without any notice.

A mortgage where the down payment is equal to 20% or more of the property’s value or purchase price is called a conventional or low-ratio mortgage. A low-ratio mortgage does not normally require mortgage protection insurance. A conventional mortgage is attached to the property and the mortgage terms cannot be changed. A new mortgage would be required to make any changes to a conventional mortgage. This type of mortgage is best for Owners who have 20% of the purchase price available for a down payment, plus closing costs and a couple of months worth of household expenses saved. Conventional or low-ratio mortgages are good for an owner who is transferring a mortgage in from another institution (with no changes).

A high-ratio mortgage is a mortgage in which the homebuyer is contributing less than 20% of the value or purchase price of the property as down payment. This type of mortgage requires mortgage default insurance — insurance offered by three mortgage insurance companies in Canada: Canadian Mortgage and Housing Corporation (CMHC) , Genworth Canada, and Canada Guaranty. First time home buyers who rely on CMHC often choose a high-ratio mortgage. This mortgage type is also a good option for any Owner who has between 5% and less than 20% of the purchase price available as a down payment (plus savings to cover closing costs and first few months of household expenses). An Owner who may have 20% down, but does not have enough saved to cover the first few months household expenses and closing costs, may also opt for this type of mortgage.

A collateral mortgage is an all-inclusive loan over your property and can also include lines of credit. A collateral mortgage can be up to 80% of the value of your home. This mortgage type is a good option for an Owner who has 20% of the purchase price available for a down-payment, plus closing costs and a couple of months worth of household expenses saved and ready. Collateral mortgages are offered to all Libro Owners who are not high ratio, as this type of mortgage provides flexibility for the Owner to use the equity in the home to borrow funds in addition to their mortgage at a lower rate without incurring legal fees. Some Owners will use their collateral mortgage to set up a line of credit for home renovations or other large projects.