Make sure mortgage features fit your circumstances

Posted by Admin on April 28, 2010

Ensuring you have the right type of mortgage for your circumstances, budget and lifestyle is the first step in managing this important piece of your overall financial picture.

Below is a quick overview of some of the more common types of mortgages on the market today.

Conventional mortgage:

Under a conventional mortgage, a lender will normally provide up to 75 per cent of the appraised value or purchase price of the property, whichever is less. You must be able to provide the balance of the purchase price.

High-ratio or insured mortgage:

Here the lender finances up to 95 per cent of appraised value or purchase price, whichever is less. This type of mortgage must, by law, be insured against non-payment by either Canada Mortgage and Housing Corporation or Genworth Financial Mortgage Insurance Company of Canada. You will normally have to pay a slightly higher interest rate than a conventional mortgage to cover the insurance fee.

Open mortgage:

An open mortgage allows payment of the principal, in part or in full, at any time without penalty. Open mortgages tend to be for a short term, usually a year or less. They typically have a higher interest rate than a closed mortgage because they offer greater flexibility.

Open mortgages are worth considering when interest rates are declining or if you have a short-term need.

Closed mortgage:

A closed mortgage features regular payments for the term you select. A penalty usually applies if you repay the loan in full prior to the end of the term.

Closed mortgages are available for short or long terms and are worth considering when interest rates are rising.

Convertible mortgage:

A convertible mortgage allows you to convert your mortgage to another mortgage type at any time without penalty. Often a convertible mortgage will specify what type(s) of mortgage can be selected.

Fixed-rate mortgage:

A fixed-rate mortgage has a set or fixed interest rate that does not change during the term of the mortgage.

Fixed rate mortgages are ideal for individuals who want their payments to stay the same and want to know the amount that will remain owing at the end of the term.

Variable rate mortgage:

Variable rate mortgages generally have a lower interest rate than fixed-rate mortgages with the potential to accelerate the reduction of the outstanding balance and, as a result, reduce your interest costs. The interest rate will fluctuate and may increase depending on market conditions.

Some variable rate mortgages offer a fixed payment for the full mortgage term. The portion of the payment that is applied to the principal fluctuates with changes in interest rates. This may either shorten or lengthen the amortization period.

Other variable rate mortgages have payments that fluctuate depending on the then-current interest rate.

Variable rate mortgages are worth considering if you’re comfortable with, and can manage, changing interest rates and/or changing payments.

Determining the right mortgage and options for your situation can be confusing. I can connect you with a London Life mortgage planning specialist who can answer all your mortgage questions.

The information provided is based on current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of the writer’s knowledge as of the date submitted for publication. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature, and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors.