| In Canada there are two types of mortgages available | | | | can pay off all or part of your mortgage at any time |
| to residential borrowers, one being a conventional | | | | without penalties). Others that offer a 'prime minus' |
| mortgage and the other is a high-ratio mortgage. Within | | | | interest rate (e.g. prime - 0.375%) may charge a |
| both types of mortgages there are two sub-types, | | | | penalty. |
| which are either open or closed mortgages. | | | | The interest rate on most variable rate mortgages is |
| To clarify the various options one can be presented | | | | compounded monthly. |
| with when shopping for a mortgage this article is | | | | CAPPED RATE MORTGAGES: |
| divided into two parts; | | | | These are variable rate mortgages that the lending |
| Part one deals with the difference between a | | | | institution has rate 'capped'. In other words, the rate will |
| conventional mortgage and a high-ratio mortgage and | | | | fluctuate with prime, but the institution guarantees that |
| part two deals with the different sub-types of | | | | you will not pay more than a certain interest rate, set |
| mortgages available within the two types. However, | | | | by them. |
| these are fairly generic explanations - just as there are | | | | These mortgages often have a penalty for early |
| many different lending institutions, so there are almost | | | | 'payment in full' and are often not portable. |
| as many different varieties of mortgages available. | | | | CLOSED MORTGAGES / FIXED RATE |
| This is another good reason to consult a mortgage | | | | MORTGAGES: |
| broker. Depending on your situation, one type of | | | | The expression 'closed mortgage' originates from the |
| mortgage may be better for your circumstance than | | | | 1980's when this type of mortgage was literally 'closed'. |
| another. | | | | You contracted to the lender to make your payments |
| CONVENTIONAL MORTGAGE: | | | | for the term chosen, you could not pay anything |
| If you have at least 20% of the purchase price (or | | | | additional, nor could you pay off the entire amount for |
| appraised value if this is lower than the purchase price) | | | | any reason except the sale of your property. |
| as a down payment, you can apply for a conventional | | | | These days, there are many ways to pay down your |
| mortgage. | | | | mortgage principal quicker, though the name 'closed' |
| Some lenders may require either CMHC, Genworth or | | | | mortgage still remains. See pre-payment options for |
| AIG insurance as well because of the property's | | | | ways to pay off your mortgage quicker. |
| location or type, even though you have 20% or more | | | | Fixed rate mortgages are the most popular type of |
| equity. | | | | mortgage. You benefit from the security of locking in |
| LOAN TO LENDING:to 65% 0.50% | | | | your mortgage interest rate, for lengths of time ranging |
| 65.1 to 75% 0.65% | | | | from 3 months up to 25 years. The rates are slightly |
| 75.1 to 80% 1.00% | | | | lower than for an open mortgage for the same term. |
| 80.1 to 85% 1.75% | | | | If you think interest rates could rise, you may want to |
| 85.1 to 90% 2.00% | | | | choose a longer term, such as a 5 or 10 year term. If |
| 90.1 to 95% 2.90% | | | | you think that rates are going lower, you may want to |
| 95.1 to 100% 3.10% | | | | gamble on a shorter length of time. Discuss this with |
| Please note: Insurance premiums are higher when the | | | | your Mortgage Broker. |
| amortization is greater than 25 years or if there is | | | | The major lending institutions have different |
| more than one advance. This usually happens if you | | | | pre-payment options allowed under their contracts. |
| are building your house or having it built for you. Check | | | | These options allow you to pay off your mortgage |
| with your Mortgage Broker to learn what the | | | | faster. It is also possible to pay off most closed |
| applicable premiums will be. | | | | mortgages prior to the end of the term or pay down a |
| The insurance premium is calculated by multiplying the | | | | portion of the balance owing. However, lenders charge |
| mortgage amount needed by the applicable | | | | penalties for doing so. |
| percentage. | | | | Please note that some lending institutions will not give |
| For example: | | | | any pre-payment options. It is wise to find out what |
| If the purchase price is $112,000 and the required | | | | options are available before entering into any |
| mortgage is $100,000. You divide 100,000 by 112,000. | | | | mortgage contract. |
| This equals 89.29%. | | | | CONVERTIBLE MORTGAGE: |
| Looking at the above chart - the premium is 2.00% | | | | These are fixed rate mortgages for terms of 6 |
| when the lending ratio is 89.29%. | | | | months or 1 year. Not all lending institutions offer |
| The next step is to multiply the mortgage amount by | | | | convertible mortgages. With a convertible rate |
| the insurance premium. Using our example this means | | | | mortgage you can lock into a longer term during the |
| $100,000 X 2.00% = $2,000. Your actual mortgage | | | | current term of your mortgage without penalty - but |
| loan will therefore be $102,000. | | | | only with the same lender. For example, if after a |
| CMHC's 5% DOWNPAYMENT PROGRAM was | | | | couple of months you hear that interest rates are |
| originally for first-time homeowners, but was expanded | | | | going to increase, you may change to a longer term |
| in May 1998 and is now available to all purchasers | | | | mortgage such as the 5 year term. |
| (principal residence only) who meet the normal | | | | REVERSE MORTGAGE: |
| requirements. Furthermore, borrowers can now even | | | | CHIP - Canadian Home Income Plan is the name of |
| borrow up to 100% of their purchase price under new | | | | the company providing reverse mortgages in Canada. |
| CMHC's Flex Down Insurance Program. | | | | A reverse mortgage allows homeowners to convert |
| CMHC may set maximum purchase prices under | | | | equity in their homes into cash, without selling the |
| these programs depending on the city so check with | | | | property or having to make monthly payments. |
| your Mortgage Broker to learn what the price limits are | | | | To qualify, homeowners must be at least 62 years old, |
| in your area. | | | | have significant equity in their property and live in B.C. |
| If the property is a duplex (and you are buying both | | | | or Ontario. |
| sides), with one side being owner occupied, the | | | | The amount that can be borrowed depends on the |
| minimum down payment is 5.0%. | | | | homeowner's age. Reverse mortgages are for |
| Mortgage brokers and lenders must verify that the | | | | between 10% and 40% of the appraised value of the |
| borrower has the 5% down payment and 1.5% of the | | | | home. The older the homeowners, the more they can |
| purchase price to cover closing costs. The only | | | | borrow. |
| exception to the 1.5% is when the purchaser qualifies | | | | The homeowner retains ownership and possession of |
| for an exemption of the Land Transfer Tax (Ont.) or | | | | the house. The lending company registers a reverse |
| Property Transfer Tax (B.C.), or similar provincial tax | | | | mortgage against the property. At death, or when the |
| exemption. In these cases the mortgage broker or | | | | house is sold, the loan and the accrued interest must |
| lender must ensure that there are sufficient funds | | | | be repaid. |
| available to cover all remaining closing costs. | | | | The biggest disadvantage to reverse mortgages, is |
| OPEN MORTGAGES: | | | | that the interest keeps building on the amount of |
| An open mortgage allows you to pay off part or the | | | | money borrowed (hence the maximum 40% loan). |
| entire mortgage at any time without penalties. Open | | | | This means that if you borrow $50,000 this year and |
| mortgages usually have short terms of six months or | | | | your interest bill is $5,000, next year your interest will |
| one year. The interest rates are higher than those for | | | | be charged on $55,000 and so on. The longer the loan |
| closed mortgages with similar terms. | | | | is in place, the greater the interest bill that has to be |
| VARIABLE RATE MORTGAGES / ARM | | | | paid. |
| (ADJUSTABLE RATE MORTGAGES): | | | | It is possible that when the house is sold, 100% of the |
| At the start of a variable rate mortgage, the lender will | | | | proceeds from the sale may be required to pay off a |
| calculate a mortgage payment that includes principal | | | | loan. |
| & interest. For the term of the mortgage your | | | | If the homeowner dies the estate will have to pay off |
| payments usually do not change. However, as the | | | | the loan and the accrued interest. This may wipe out |
| prime rate changes so will your mortgage rate. | | | | any inheritance for the homeowner's heirs. |
| If interest rates are dropping, less of each payment will | | | | An alternative is to establish an equity credit line. This |
| go toward interest and more will go toward principal. If | | | | allows you to take funds only as you need them, |
| interest rates rise, more of your payment will be | | | | thereby owing the least interest possible, with no |
| interest and less money will be reducing your principal. | | | | surprises. |
| Some of these mortgages are completely open (you | | | | Consult with a financial advisor for more alternatives. |