• Conventional or High Ratio Mortgages
  
• Open or Closed Mortgages
  
• Fixed Rate or Variable Rate Mortgages
  
• Special Mortgage Features
  
  

CONVENTIONAL MORTGAGES are mortgages where you require a down payment (or equity) equal to 20% or more of the property’s value, leaving a loan to value ratio to 80% or less. Conventional mortgage does not normally require mortgage loan insurance.

A HIGH RATIO MORTGAGE is one where you are contributing less than 20% of the value of the property as a down payment (or equity). If the loan-to-value ratio is 80% or greater, the mortgage is considered to be high ratio, and if provided by a federally chartered institution, must be insured against default. Currently, high ratio mortgages must be insured through either Canada Mortgage and Housing Corporation (CMHC) or GENWORTH Financial Canada or AIG United Guaranty Mortgage Insurance Canada.

The Insurance premium on high ratio mortgages is charged only once per mortgage, when the mortgage funds are originally given to you. The premium can be paid up front or it can be added to the mortgage amount. Insurance premiums are calculated based on the loan-to-value ratio of the mortgage.


OPEN VS CLOSED MORTGAGE

In addition to being either a conventional or high ratio mortgage, a mortgage may be closed or open.

A CLOSED MORTGAGE is a mortgage that does not allow any prepayment or early repayment of the mortgage, except on the sale of the property. In other words, a closed mortgage does not permit you to make any payments before the end of the mortgage term, other than on the regular scheduled payment dates.

AN OPEN MORTGAGE, by comparison, allows you to repay all or part of the principal amount at any time with or without notice or penalty.

FULLY OPEN MORTGAGES allow principal payments to be made in any amount, at any time, in addition to your regular mortgage payments. They usually have short terms of six months to one year. Interest rates on open mortgages are higher than on closed mortgages to offset the uncertainty that you pay off the loan at any time. Fully open mortgages are not offered by many lenders.

Traditional concepts of open or closed have given way to create options. Mortgage products now contain both open and closed provisions. Only a part of the principal may be open without notice or penalty or the mortgage may be periodically open at scheduled times for principal reduction. For example a 20/20 option provides that up to 20% of the original mortgage amount can be paid on anniversary dates and periodic payments can be increased 20% at the same time. The balance of the mortgage remains closed.

Other payment options are:

• Double up your payment
  
  
• No cost switching of payment frequency (the option to switch the repayment schedule from monthly to semi-monthly, bi-weekly or weekly)
  
  
• Skip payment option (the option to skip a payment without the mortgage going into default)
  

While these are basic options available, different lenders will have their own unique products, or have different names for the options outlined above.


FIXED VS VARIABLE RATE MORTGAGES

In a FIXED RATE MORTGAGE the interest rate is determined and stays the same for the term of the mortgage. The fixed rate mortgage was once the standard type of mortgage product that was available in Canada.

Typically, fixed rate mortgages for longer terms are popular when interest rates are low, but are expected to rise in the future. In this way you can “lock-in” your mortgage at existing, presumably lower than future, interest rates.

In a VARIABLE RATE MORTGAGE, which is also known as ADJUSTABLE RATE MORTGAGE (ARM), the interest rate charged on the mortgage loan will fluctuate as market interest rates move. This type of loan differs from a fixed rate mortgage in that the interest rate charged on the loan may be changed during the term of the mortgage. Generally, these loans are initially set up like a standard loan, based on the current interest rate. The loan is reviewed at specified intervals over the term of the mortgage loan (usually monthly). If the market interest rate has changed, so will the interest charged on the mortgage. Changing either the size of the payments or the length of the amortization period (or a combination of both) at this time will alter the mortgage repayment plan.

CAPPED RATE VARIABLE MORTGAGES are variable rate mortgages on which the lending institution has set a limit to interest rate increases or decreases. This means that the interest rate of the mortgage will fluctuate but the lender has set a rate and guarantees that you will not have to pay interest rate at higher than that limit.

Variable rate mortgages may offer a CONVERTIBLE RATE feature, allowing you to lock in to a longer term (not less than 3 years) fixed rate mortgage at any time without penalty.


SPECIAL FEATURES

Mortgage lenders are continuously creating new features to differentiate their mortgage products to attract your business. Special features can include:

• Cash Back Mortgage: This option gives you cash back based on a set percentage of the mortgage principal. This cash is typically intended to be used to cover closing costs, but can be used for any purpose except for the down payment. There is an exception to this. The ‘No Down Payment Mortgage’ was developed so that the cash back feature could be used for the down payment.
  
  
• Assumable Mortgage: An assumable mortgage allows the purchaser to take over (assume) the mortgage already existing on the purchase property. This is especially attractive if mortgage rate to be assumed is lower than the mortgage rates available in the current market.
  
  
• Portable Mortgage: If you are buying another home, the portable mortgage feature allow you to transfer the current mortgage to that new property (subject to credit approval and appraisal).
  
  
• Expandability or Add-on feature: This is an option that allows you to expand, or increase, the mortgage principal. The interest rate for the amount “added-on” is blended with the interest rate on the existing mortgage.
  
  
• Step Mortgages: This type of mortgage product attaches a mortgage loan to a line of credit and /or auto loan, in one package, allowing you to combine all your personal borrowing to one plan.
  
  
• Tax Deductible Mortgage: This mortgage also attaches a line of credit to fixed term portion of mortgage. It allows you to re-advance the principal portion of your fixed payment back to you through attached line of credit, invest it and then deduct the interest charged on line of credit portion to create tax refunds.
  

There are a number of options for repaying mortgage loans.

• BLENDED PAYMENT LOANS (also known as constant payment loans). The payments are constant, made up of a combination of interest and principal, paid in equal amounts over the life of the loan.
• INTEREST ACCURING LOAN has no payments of interest and no payments of principal are made during the life of the loan. The full amount of principal and all interest that accumulates during the term are payable on maturity.
  
  
• INTEREST ONLY LOANS are now available to 90% of purchase price or home value. You pay only interest during the term of the loan and principal amount remains the same to maturity.