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