Picking a mortgage can be a bit of a challenge. Just like choosing a home, there are many options when it comes to selecting a mortgage that is right for your circumstances. In Canada, there are a few different options for residential mortgages. Whether you’re looking for a hybrid or an open mortgage.
Especially if you’re a new buyer, knowing what type of mortgage to choose can be a bit of a daunting task. You might find yourself asking, what are the key things I need to know about the most common types of mortgages? We’re here to share some insight into them! Remember, we are Realtors and not mortgage specialists. It’s always best to talk to a mortgage specialist. They will help you make the right choice for your own financial circumstances.
Open & Closed Mortgages
If you plan on making any lump sum mortgage payments, you might want to consider your options between a closed or an open mortgage. Most traditional mortgages in Canada are considered to be closed, which have a predetermined interest rate over a predetermined amount of time. Because of their predictability, a closed mortgage might be of interest to a borrower who wants stability. Such as working off of a fixed income or budget.
Closed mortgages still offer pre-payment options, which is when you can pre-pay your mortgage balance before the maturity date or when the mortgage term ends. However, closed mortgages may be limited to the amount you can pay.
For example, if you have a closed mortgage worth $100,000, most major banks will allow for a 20% prepayment limit. Meaning you can prepay up to $20,000 each year without penalty. If you’re planning on making a substantial payment, an open mortgage that will allow for larger payments may be a better fit.
Closed mortgages often appear enticing due to their competitively lower interest rates, but it’s important not to forget about potential brokerage fees and other features of closed mortgages. You should understand breakage costs and your mortgage’s portability should you decide to part from your closed mortgage mid-term in the event a move.
If you’re not going to stick with a closed or open mortgage for your entire term, you have the option to switch types through a convertible mortgage.
Convertible mortgages allow you to transition between a closed or open type during the term. With some lenders, it may also be possible to opt into a fixed mortgage rate if a variable term rate was originally selected.
In cases where the market is in a falling interest rate, like at the start of the pandemic, you may opt into a convertible mortgage so you can capture a lower interest rate in the near future. If you anticipate selling your home and using the funds to make substantial payment on your next property, a convertible mortgage may also be a good fit.
If you’re debating between a fixed and variable interest rate, a hybrid mortgage can offer a bit of both. With a hybrid mortgage, you have the ability to have multiple styles of mortgages under one umbrella, which can include a combination of fixed and variable rates, a line of credit and other financial products. If you’re not comfortable with the risks of a fully variable rate mortgage in the even interest rates rise, but want some stability offered with a fixed rate, a hybrid mortgage fuses the two together.
This is exclusive to home owners aged 55 and older, a reverse mortgage loan is connected to the value of the property and allows older Canadians to convert their homes equity into a lump sum of cash or regular payments.
Mortgage holders with a fixed income like a pension who want to use cash for renovations, living expenses, or to give as living inheritance to family are often interest in reverse mortgages. These mortgages are also becoming increasingly popular as the Baby Boomer generation lives longer and enjoys an active lifestyle in their homes.
Whether you’re a first time home buyer or your mortgage term is coming up to maturity, It’s important to work with a mortgage professional who you can have an in-depth conversation with about your finances, goals and options. Make sure to ask questions about all of your mortgages features, pre-payment options, costs to break mortgage as well as clarification on interest rates.
Whenever your mortgage term comes up for renewal, it’s an opportunity to reassess your life goals and priorities. As your life evolves, the mortgage type you signed up for during your last term may no longer be the best fit for you in the future.
If you’re looking for a mortgage specialist, we can help! We have worked with a variety of different mortgage specialists and can refer you to one that fits you and your life goals accordingly. Reach out to us today to find a mortgage specialist who can help you achieve your real estate goals!