Overview
We are going to go over 5 sections in this guide:
- Insurability: Conventional, Insurable and Insured Mortgages
- Rate Type: Fixed, Variable and Adjustable Rates
- Payment Type: Interest-Only and Amortized Mortgages
- Open vs Closed Mortgages
- Charge Type: Standard Charge vs Collateral Charge
In each section we will talk about what the options are and what pros and cons exist for each choice.
Insurability: Conventional, Insurable and Insured Mortgages
Conventional Mortgages:
Mortgages where the down payment is at least 20% of the property’s purchase price or appraised value.
Effectively considered a “standard” mortgage as there are no additional requirements.
Conventional mortgages can often go up to 30 year amortization so can offer really great budgeting options.
Insured Mortgages:
Insured mortgages are mortgages that the lender requires to be insured. Generally the insurance premium is paid by the borrower by increasing the mortgage loan balance.
There are 2 main reasons to get an insured mortgage:
- If the borrower is putting less than 20% of the property value in as down payment and buying the property as their personal residence or second home
- If the lender requires the mortgage to be insured due to the property or the borrower
There are 3 insurer options in Canada: CMHC, Genworth, and Canada Guaranty provide this type of insurance.
Here are some of the main guidelines for insured mortgages:
- Minimum down payment:
- 5% of the first $500,000 of the purchase price
- 10% of the remainder if the purchase price is above $500,000
- Only properties under $1mil can be insured
- Amortization of 25 years or less
- Insurance premium based on the loan to value and loan size that’s added to the mortgage balance
Insurable Mortgages:
Insurable mortgages that can be insured but the lender pays for the insurance on behalf of the borrower. By doing this, the lender reduces their risk on the loan allowing them to offer lower rates.
These mortgages are always less than 80% of the property value and the property value cannot exceed $1mil.
They generally follow insured guidelines.
Rate Type: Fixed, Variable and Adjustable
Fixed Rate Mortgages
- Definition: The interest rate remains the same throughout the term of the mortgage.
- Common Terms: Available in various term lengths, typically ranging from 1 to 10 years.
Variable Rate Mortgages (VRM)
- Definition: The interest rate fluctuates with the lender’s prime rate but the mortgage payment amount remains constant.
- Mechanics: Changes in rate directly affect the portion of the payment that goes towards the principal vs. interest.
Adjustable Rate Mortgages (ARM)
- Definition: Similar to variable rates where the interest rate fluctuates with the prime rate, but the payment amount can change.
- Key Feature: Monthly payments increase or decrease as interest rates change.
Payment Type: Interest-Only and Amortized Mortgages
Amortization
Did your eyes glaze over just now?
Amortization is a weird term and basically all it means is that you’re making regular payments to your principal balance.
Your amortization period is the length of time it will take to fully pay your mortgage down to zero. So if you have a 25 year amortization, it means that after 25 years of making payments, your mortgage balance would be zero (assuming all other factors stay the same).
Interest-Only
Interest-only on the other hand is where you are making payments that are only interest – therefore your mortgage balance doesn’t change.
In most cases, interest-only mortgages charge a higher rate but can often be a lower payment.
Open vs Closed Mortgages
When talking about mortgages, you may hear people discuss and “Open Mortgage” and a “Closed Mortgage”. The “Openness” has to do with the flexibility of paying off your mortgage or making changes to your mortgage without paying a penalty.
An Open Mortgage allows you to make these changes without the penalty.
On the flip side, a Closed Mortgage does not allow you to make these changes without a penalty.
In most cases, when it comes to mortgages, lenders price their rates high for the more flexible options. As you would expect then, open mortgages have a higher rate than closed mortgages.
In Canada, closed mortgages are significantly more popular because of their lower interest rates and their stability in terms.
Charge Type: Standard Charge vs Collateral Charge
First, what is a charge?
A “charge” is a bunch of mortgage information and documentation that is attached to your legal property documents at the Land Registry. This provides a central place for your information. It also means that if a change occurs on the property, your lender will be informed about it – e.g. a second mortgage.
This charge document contains a few items and details about the mortgage you’re getting – more on that later.
There are 2 main mortgage charge types:
- Standard Charge
- Collateral Charge
What are the differences?
Standard Charge
We’ll start here because it’s the “simpler” of the two.
A standard charge contains the actual mortgage details for the mortgage you’re requesting. It will have the balance owing, interest rate, term, payment, etc.
As the mortgage get’s paid down, the charge on title gets paid down too.
With Standard charge mortgages you can take out additional financing behind your first mortgage as a second mortgage or HELOC. Any material changes made will incur legal fees to adjust the charge on the real estate title.
Some lenders will allow you to transfer this charge to another lender allowing lower legal fees if you want to switch lenders. This can allow for more options during your renewal.
Collateral Charge
You can think of a collateral charge as a box. It has a maximum limit which dictates how much mortgage you can have. This amount can be as little as the mortgage you are requesting OR as high as 125% of the property value.
If you are getting financing or refinancing, as long as you stay within the limit above, and you are not changing lenders, you will not be required to register a new charge and pay legal fees.
This can be beneficial if you plan to refinance or make structural mortgage changes.
The biggest benefit to collateral mortgages is the ability to structure Combined Loan Products – aka mortgage and HELOC combinations. This gives more flexibility in your debt structure – super important if you are using a tax advantage strategy like the Smith Maneuver or investing in real estate.
These types of mortgages can be slightly more expensive to change lenders at renewal if you plan to keep your terms the same. The reason is that you would be doing a full “refinance” instead of transferring the charge. This means you will have to pay for legal fees to move the mortgage.