Buying a house is one of the biggest monetary decisions an individual makes in their life. It goes without saying that as a borrower, it is important to educate yourself with the intricacies of the Mortgage world. It is also important that you gather the information that’s needed to making the right home purchase decision.
With this article, we aim to help you understand different types of mortgage options and the process involved so that you ask the right question and find the best solution when it’s time to buy a home.
What’s a Mortgage?
Home purchases are expensive. It’s a financial commitment that needs you to invest wisely. The chances of you walking through your dream home by paying the entire purchase price in cash are highly unlikely. Most homeowners pay down payment and to cover the remaining costs, they head out to lenders who offer a loan. The loan amount you get to pay the rest is called mortgage. In simpler terms, it’s a contract between you and the lender that summarizes loan details.
Types of Mortgages in Canada
Getting qualified for a mortgage can be stressful. And once you do, the next step is to decide what kind of mortgage you’d prefer to go for. But before you do, it is important to keep in mind that there is no one-size-fits-all mortgage. You can reach out to different lenders to find the perfect mortgage solution that meets your needs. Mentioned below are the different kinds of mortgages that a Canadian individual can avail of, how do they differ from each other, and which one is the right option for you.
Broadly mortgages can be classified into 4 categories. The below table further classifies the various types of mortgages.
|Institutional Mortgages||Private Mortgages||Commercial and Construction Lenders||Alternative Mortgages|
|1. Conventional Mortgages 2. High Ratio Mortgages 3. Open/Closed Mortgages 4. Fixed-Rate Mortgages 5. Variable Rate Mortgages (VRM) 6. Portable Mortgage 7. HELOCs 8. Cash Back Mortgage||1. Bridge Mortgage 2. Second Mortgage||1. Commercial Lenders 2. Construction Lenders||1. Reverse Mortgage|
Let us further break down each of these mortgage types to help you make the right decision while shopping for mortgages.
- Conventional Mortgages
- Most commonly applied for mortgages
- Borrowers need to make a 20% down payment
- Loan value approximates around 80% or less
- Not necessary to buy a mortgage default insurance
2. High Ratio Mortgages
- A loan is considered a high ratio when the down payment is below 20 percent
- Necessary to get mortgage default insurance
- Mortgage default insurance is paid along with your regular mortgage payments
3. Open-Closed Mortgages
- Open mortgages can be paid in full any time without any penalty
- Open mortgages come with high rates
- Closed mortgages limit you with the amount can pay towards the mortgage
- Closed mortgages often come with prepayment benefits that include increasing your payment and paying lump-sum amounts
4. Fixed-Rate Mortgages
- Fixed-Rate Mortgage allows you to keep a steady mortgage rate throughout the mortgage term
- Mortgage terms can vary from one to over five years of time frame
- More popular amongst Canadians
- The lender will typically offer you a renewed mortgage at the end of the term if there is a balance left on your amortization period.
- Renewed mortgage comes with the option of the new term and whatever interest rate is applicable at the time of renewal.
5. Variable Rate Mortgages (VRM)
- Mortgage rates vary during the term
- Lenders can change the prime principal when the Bank of Canada changes its lending rate
- Mortgage rates are lower than fixed mortgages but can increase during the term
6. Portable Mortgage
- Common in most institutional mortgages
- Can be transferred from one property to another without any penalty
- Is offered by selected lenders and have specific terms and conditions
- Home Equity Line of Credit
- Allows you to borrow equity against your home
- Most commonly used for debt consolidation and to renovate homes
- Can get you up to 65 percent of the value of your home
8. Cash Back Mortgage
- Borrowers receive cash upfront
- The loan amount can be used for moving expenses, renovation, new furniture or anything else except paying your down payment
- Comes with higher interest rates
- Involves the risk of paying back the cash on prorate basis if you are unable to pay the mortgage during the term
- Bridge Mortgage
- Also known as bridge mortgage
- A temporary loan where you can sell your current home to purchase a new home
- Mostly opted when the closing dates don’t match
2. Second Mortgage:
- Has a higher interest rate
- Mostly refers to a home with two mortgages
Commercial and Construction Lenders
- Commercial Lenders
- Offers business-related mortgages secured by a commercial establishment
- Best for an office building, apartment building or a shopping centre
- Widely used to gain access to a commercial property or to redevelop it
2. Construction Lenders
- Offer mortgage financing to be used for a real estate development
- Reverse Mortgage
- Available only for Canadian nationals above 55 years of age
- Allows the borrower to access up to 55 percent of home equity
- No need to make payments on a reverse mortgage
- Interest on this mortgage accrues over time and the borrower is liable to pay this accumulated mortgage once they sell the house or move into another primary residence.
What Type of Mortgage Should You Apply for?
Whether it’s your first time applying for a mortgage or refinancing it, there is no one perfect solution unless you work along with your financial advisor to do your homework. You need to collect all the information, understand your financial standing, evaluate your requirements and then reach out to a finance professional to have a wide overview of the options available at your disposal.
Mortgages are just the beginning of your home buying journey. However, it is advised to make a confident decision by weighing in all the options. If you are still facing troubles in securing the right mortgage for you, contact Avon Financial. Our experts provide honest and reliable guidance when it comes to residential as well as commercial mortgage and financing solutions.
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