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Types of Mortgages

Beginning October 15, 2008 the "0" down payment and the 40 years mortgage amortization mortgages are no longer applicable in Canada.

Conventional Mortgage:

If you have at least 20% of the purchase price as a down payment, you can apply for a conventional mortgage (depending on the property or location - some lenders may still require mortgage insurance - check with your lender).

As a rule this mortgage does not require CMHC or Genworth insurance and the interest rate does not change during the entire term of the loan.

A conventional mortgage can be floating or fixed rate.

Features of a Conventional Mortgage:

- Usually do not require the additional cost of mortgage insurance
- Longer terms
- Secured interest rate on fixed mortgage
- The borrowed amount is less
- Standard length of time is 15-30 years

Payment options:

- Weekly/biweekly/semi monthly or monthly
- Blended payments of principal and interest
- Interest only payments in certain circumstances

High ratio mortgage:

If you have less than 20% of the total purchase price to put down as your down payment, this type of mortgage must be insured by such sources as CMHC or G.E.

High ratio mortgages are designed particularly for those who can provide from 5 to 20% of the market value of the home as a down payment.

Features:

- Allows property purchase with a minimal down payment
- For existing For Sale by Owner homeowners, it allows you to use the equity in your home by increasing your existing mortgage to borrow for personal use or renovations/debt consolidation, etc.
- Mortgage rates are identical to conventional mortgages
- Mortgage is by default insured by CMHC or Genworth (this protects the lender not the borrower)
- Funding up to 95% of property purchases
- Funding up to 90% of property price for refinancing

Payment Options

- weekly/biweekly/semi monthly/monthly
- blended payments (principal & interest together)

5% Downpayment

CMHC's 5% down payment program was originally designed to assist first time buyers. This program was revised in 1998 and is now available to "all" For Sale by Owner purchasers who meet the standard requirements.

Genworth also has a 5% down payment program. And the premiums for mortgage insurance can be added to the mortgage amount or paid at the closing date. Most First Time Buyers incorporate it into the mortgage this way additional funds beyond closing costs are not required.

Types of Mortgages

1. Fixed/closed rate mortgage
2. Convertible mortgage
3. Open mortgage
4. Cash back mortgage
5. Reverse mortgage
6. HELOC
7. Variable rate mortgage
8. Bridge financing
9. First Mortgage
10. Second Mortgage

1. Fixed/Closed Rate Mortgage

Fixed rate mortgages are the most popular type of mortgage especially among first time buyers. They offer security and peace of mind knowing that your interest rate and payments will not change during the term of your mortgage.

Having a fixed payment allows you to budget out your monthly expenses easily. If your mortgage payment is fixed and the interest rates goes up, it does not affect you whatsoever until such time as term renewal.

Lending institutions have different pre-payment options allowed in their contracts. Contact your lender for further details. Most have a program called: "15 + 15" which means you can pay 15% of original mortgage each year and 15% in extra payments (double your payments) without penalty.

2. Convertible Mortgage

When interest rates are on their way down or you think they might be going down soon, a 6 month convertible mortgage offers you the short term commitment at fixed payments with the added feature that while within the term, the mortgage is fully convertible and can be changed into a longer term without penalty (from 1 to 10 years).

For example: At the end of 6 months the interest rate has lowered from 6% to 4.2%, you can now free to lock-in the lower rate.

The same works in reverse. If the interest rate is increasing you can lock in the lower rate to stop the increase. Or at the end of 6 months you can even transfer to another financial institution without penalty. It is a versatile short-term option.

3. Open Mortgage

An open mortgage allows you the flexibility to pay-off or repay part or entire mortgage amount at any time without penalty, and the interest rate is higher than fixed/closed rate mortgages by as much as 2% or more.

They are normally chosen if you are thinking of selling your home, or if expecting to pay-off the whole mortgage or a portion that exceeds your 15% prepayment allowance from the sale of another property. Also inheritance or insurance claims have been deciding factors.

The open mortgage is offered at a fixed rate for the term and you have the flexibility to convert your mortgage at any time to a different type of mortgage without a fee or penalty. Open mortgages usually have short terms of 6 months to 1 year.

Advantages of Open Mortgage:

  1. It is a flexible plan. If you want to free yourself from the loan, you can do it without penalty.
  2. If you choose a variable-rate plan, you may get a term up to 2 years.
  3. Even though the interest rates are high, you can save a good amount as the tenure of the loan is shorter.

4. Cash Back Mortgage

This program is available to everyone, but was really designed for first time buyers. The benefits were a For Sale by Owner buyer would receive cash back that can be used for other expenses that arise from purchasing a home, such as:

- Closing cost/legal fees;
- Moving expenses;
  -Appliances or furniture; or
- Some other department needing payment

Your cash back is paid on the date that your funds are advanced just in time to help you cover immediate expenses. The money received from the cash back option is yours to keep so long as the mortgage is held to the end of its negotiated term. However, the drawbacks are:

- Very few banks offer this program
- Most financial institutions are requiring proof of the 5% down payment
- Some programs offer as little as 3% cash back
- Fixed terms only (3-5 years)
- No discounts on interest rates

And, if you exit the contract early, additional interest penalty will apply as well as you'll have to payback a pro-rated amount of the cash back.

So, even though there is a price to for the cash back mortgage option it may be worth considering if you are a bit short of cash and could use some help with closing costs or other expenses. Just remember that there is a price to pay for the gratification.

5. Reverse Mortgage

Reverse mortgage are available to any person over the age of 62 who has enough equity.

How does it work?

This program allows a homeowner to borrow equity. Instead of making payments to the lender, the lender makes payments to the borrower.

This can be done in the form of:

- A lump sum
- Monthly
- Periodic advances
- Or a combination of above

The interest rate can be fixed or adjustable.

Like with a regular loan, borrowers pay a fee to get the money. This change can be incorporated into the loan and financed. Fees vary with the lenders.

The amount of loan depends on the type of program selected and how much equity is retained in the home after paying off the existing mortgage as well as the borrower's age.

The FSBO homeowner retains ownership and possession of the home. The lending company registers a reverse mortgage against the property. At death or when the house is sold, the loan and the accrued interest must be repaid. It is possible that when the house is sold, 100% of the proceeds from the sale may be required to pay off the loan.

If the homeowner dies before the end of the term, the estate will have to pay off the loan and the accrued interest. This may wipe out any inheritance for the homeowner's heirs.

An alternative is to establish an equity credit line. This allows you to take funds only as you need them, thereby owing the least amount of interest possible.

6. Home Equity Line Of Credit 

Allows you to use the equity in your home that you have built up to purchase investments (where interest costs would be deductible against the earned income), finance home renovations, and buy a car or any other reasonable needs with rates as low as prime.
(Lenders may vary the HELOC's amount). Accessing the available credit is as easy as writing a cheque (other forms of access also available).

You have the advantage of using only the funds you need and only pay on the balance owing. You can pay off the balance in full/in part or make regular payments or only pay the interest. There is no scheduled payment however you are obligated to pay "no less" than the interest payment.

Once the money (or part of) has been repaid, you can use it again and again without having to re-qualify each time.

Being a secured product, there are normal legal and appraisal fees that are applicable.

The time to apply for the Home Equity Line of Credit is when you don't need it. It is the credit that will be available to you should you ever need to draw on it, if you do not draw money out, there is no payment required. You pay only on what you owe.

7. Open Variable Rate Mortgage

This mortgage's interest rate fluctuates. At the start, the lender will calculate a mortgage payment that includes principal and interest. Be prepared for a slightly fluctuating payment as the prime rate does change from time to time. However, as the prime goes down, more of your monthly payment is applied to the mortgage.

If the prime increases more funds are directed towards the interest.
This type of mortgage appeals to those who want maximum flexibility. People who are considering selling their home or planning on paying large sums at a time, appreciate the no penalty feature.

Key features:

- Interest rate varies with prime
- Usually a 5 year term
- Pay-out any time without penalty (open)
- You can change to another term at any time
- You can shift your mortgage to another property

8. Bridge Financing

Bridge loans are used by sellers who want to buy a new home before selling an existing home, but need cash to do it. 

The bridge loan is secured to the existing home. The funds from the bridge loan are then used as a down payment on the new home.

During this period of time (until the existing home sells) the seller will own 2 homes (not all homeowners qualify for this type of financing). Once the seller's home sells, the loan amount is repaid and the bridge financing is removed or closed.

There is a set up fee charged by the lender to have the bridge loan arranged plus the cost of the interest. The rate charged can vary from bank to bank.

9. First Mortgage

A first mortgage is the first debt registered against a property that is secured by a first "charge" on the property. If a default on the mortgage occurs, the first lender has first right on the property to recover the outstanding principal and interest costs, as well as any other costs incurred during the process.

10. Second Mortgage

A second mortgage is a debt registered after a first mortgage has been registered. In most cases the interest charges on a second is higher reflecting the higher risk to the lender but over a short term, still cost effective than paying the high cost of insurance premiums (CMHC/Genworth).