Which Mortgage Is Best?

There are a variety of mortgages, and each one has its advantages and disadvantages.

A fixed rate, closed mortgage - about 75% of mortgages across Canada are fixed rate, closed mortgages.  Typically someone locks in their rate and payment for 5 years.  This lets consumers know what their payment will be every month and how much will be left on the mortgage at the end of the 5 year term.

A variable, closed mortgage - this mortgage has a rate that floats with a financial institution's prime lending rate and is often for a 5 year term.  Usually the payment is set at the current rate and then the actual interest rate goes up and down throughout the mortgage.  The advantages are that this rate is usually lower than a fixed rate and that if the rate decreases your payment is paying more towards the mortgage principal.  However, the disadvantage is that if the rate goes up you will pay more in interest and it is possible that very little of the principal is paid down by the end of the term.

Home Equity Line of Credit (HELOC) - this is a line of credit secured by property, usually a home.  There usually is no set repayment schedule, often only requiring an interest payment or deposit each month.  This is a very flexible loan in that it can be used to buy almost anything as it is attached to a chequing account.  The largest disadvantage, however, is that the easy access and lack of repayment schedule can make it too easy to use and difficult to pay down.  This is the type of loan that the Bank of Canada has expressed concerns about being abused by Canadians.

Open mortgage - this mortgage is usually a short term mortgage, often used while trying to sell a home.  There is no penalty for paying out an open mortgage.

Capped rate mortgage - a variable mortgage with a maximum the interest rate can go up to, creating a safe ceiling for your mortgage rate.

Reverse mortgage - a mortgage against the equity built up in a home, usually reserved for seniors needing additional funds.  Up to 50% of the value of the home can be borrowed, and the interest accrues until the home is sold and the loan is then paid out.

Conventional - a mortgage that has at least a 20% down payment.

High ratio mortgage - Canadian legislation requires any mortgage for more than 80% of the value of a residential property must be insured.  There is a fee for this insurance set at a percentage of the mortgage that is paid up front.

With the exception of the open mortgage there are penalties for breaking the mortgage term.  Each financial institution allows different prepayment amounts before penalties apply.

Borrowers should always be careful about the amount of debt incurred.  While today's rates are at 60 year lows they will eventually increase.  When calculating your payments it is wise check to see if you can afford a rate increase of 2% for when your mortgage renews.  By planning ahead and getting the mortgage that is right for you, owning your home can be a dream come true.  Jerry