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Types of Mortgages

With so many mortgage options available, which should you choose? Different mortgage types are available depending on your future plans, risk tolerance, and financial goals. To pick the best mortgage type for you and your family, it’s important to understand all of your options.

A mortgage usually consists of two parts. The principal sum is the amount borrowed and interest is the cost of borrowing the money. When choosing a mortgage type, a common choice is to minimize the amount of interest you need to pay. However, there are many things to consider when deciding on what type of mortgage to select, such as if you want open flexibility in payment or a consistent payment over a period of time. That’s why we offer a variety of mortgage types to best suit your unique situation.

Different Mortgage Types

Here are a number of defined mortgage types so you can become familiar with them. A Libro Coach helps you to understand the different benefits attached to each option. Then, you’ll be ready to decide which is the best mortgage type for you.

Open Mortgage

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.

Fixed Rate Closed Mortgage

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.

Variable Rate Closed 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.

Conventional / Low-Ratio Mortgage

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).

High-Ratio Mortgage

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.

Collateral 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.

How do I decide which type of mortgage is best for me?

In order to decide the mortgage type you should choose, visit a Libro Coach — we evaluate your situation and help determine the best option for you.

Mortgage Insurance

We’re here to help you protect your family, home, and plans for the future. Your Libro Coach can help you understand your financial needs and ensure your family is protected. Buying a house is a large investment and you want to protect that investment. Mortgage protection insurance can provide the protection you are looking for. Unforeseen events such as a job loss, an accident, or the passing away of a spouse could make mortgage payments a challenge. Other events might cause damage to your home. A Libro Coach helps you to be prepared to meet unexpected circumstances with the following insurance types:

Property Insurance

The amount of home insurance purchased must be at least equal to the value of the mortgage. Property insurance can include insurance against fire, flood, water damage and theft.

Life, Disability & Critical Illness Insurance

These insurance types provide security for you and your family in case of death, illness, or injury.

Loss of Employment Insurance

This type of mortgage insurance coverage is reassuring when facing a sudden loss of employment.