There are many mortgage products in the market today, and the options can feel overwhelming. This is especially true when buying your first home, as it may appear that the choices are endless. To assist you in this process, here are a few basic types of mortgages you should know.
With a variable-rate mortgage, your interest rate can decrease or increase during the term. Most variable-rate mortgages have a five-year term.
When the Bank of Canada raises or lowers their overnight rate, banks will then adjust their prime interest rate, which affects your variable mortgage rate.
Within a variable interest rate, there are two main options, a closed and an open. An open variable rate mortgage is similar to a line of credit.
These types of mortgages are sometimes called a secured line of credit. The loan can be paid off at any time without a penalty, and the minimum payment requirement is interest only. People who need a mortgage for a short period of time or those who may need access to funds in the future can potentially look at an open variable mortgage.
Also, those who would prefer to only pay interest on the mortgage can look to this product. One downside of this loan compared to a closed variable mortgage is that the interest rate is higher. Typically it is priced between prime +0.5% to prime +1%.
In comparison, a closed variable rate mortgage is typically at a discounted rate off prime. Therefore it is prime minus a set number. As prime changes, the discount on prime will remain the same.
The penalty to get out of a closed variable-rate mortgage is typically lower than the penalty to get out of a closed fixed-rate mortgage. With a variable-rate mortgage, the financial requirement is usually three months of interest.
For example: The closed variable rate mortgage penalty on a $300,000 mortgage with a rate of 2.9% would be $2175.
If you feel interest rates are going to stay the same or decrease, you may consider a variable-rate mortgage in order to take advantage of the lower interest rates. A five-year variable rate typically has a lower interest rate than a five-year fixed rate with these types of mortgages.
Learn more: Bank of Canada
A fixed-rate mortgage is one of the most popular mortgage options. This mortgage has the same interest rate for a set period of time. Usually, this timeframe ranges from six months up to 10 years. These types of mortgages are perfect for a significant amount of home buyers.
Typically, the longer you lock in an interest rate, the higher the interest rate. The reason for this is that having a rate held for a longer period of time gives you more security. However, it is also riskier for the lender if rates are to increase during that time.
During the term, your payment will stay the same regardless of changes in interest rates. Those who are cash-flow-sensitive may appreciate this factor when deciding what kind of mortgage to apply for.
Learn more: 5 year fixed rate mortgage
There is a penalty associated with paying a lump sum that is more than your allowed pre-payment amount on a fixed-rate mortgage. Unfortunately, cannot be known until the time you want to pay it off. This is due to fixed-rate mortgage penalties being the greater of three months of interest or an interest rate differential.
For those who do not meet traditional lending guidelines or whose needs are a bit more time-sensitive, there are options with private mortgages and alternative lending.
For example, perhaps you are new to self-employed income, have bad credit, or need to obtain financing within a few days. These may be scenarios where you want to look at different options compared to traditional mortgages.
Typically, to acquire a private mortgage or alternative lending mortgage, the down payment needs to be at least 20%. With these types of mortgages, you can potentially obtain a solution that you otherwise would not based on your current financial situation.
However, these options can come with higher interest rates and possible fees. Some alternative lending options can have amortizations of up to 40 years or interest-only payments to help offset the higher interest rates.
These types of mortgages can be looked at as great stepping-stone solutions. They can be ideal for those who are not quite where they need to be financially to meet traditional bank guidelines but still want to proceed with a mortgage.
A private or alternative mortgage may allow you a little bit of time to get your finances in order, and from there, at renewal, you can look to refinance or with a traditional lender.
Some of these options also require less documentation. For those who are having trouble obtaining the necessary paperwork, a lender like this may help.
With the purchase plus improvements option, a homebuyer can typically work up to $40,000 in renovations into their home loan at the time of purchase, although some lenders may allow up to $100,000.
This can be a great option for those who have found a home they like, but it needs some updating. Instead of putting the renovation costs on credit cards and lines of credit after closing or using up your savings, the renovations can become part of your mortgage with the purchase plus improvements option.
Learn more: Tips for buying a home to renovate.
A construction mortgage or construction financing is an option for those looking to build a home or to buy a home and do substantial renovations.
If you’re having trouble finding a home that suits your specific needs, building your own home is a potential option. Construction mortgages are typically advanced to you in draws. The draws are done as the construction progresses. A few stages of a construction mortgage are:
The first draw can cover the cost of preparing the base or slab of the home. This includes the foundation of the home as well as levelling the ground and putting in plumbing.
This draw will help cover the cost of framing the home. The stage can typically take up to a month to complete.
The stage takes you to where you can lock up the home. With that, exterior walls, windows and doors have been installed. Also, the house is insulated.
This is where they install all the various fittings and fixtures in your home. For example, cabinets, doors, flooring and more. Also, at this stage, the builder finishes the remaining plumbing and electrical systems.
The completion stage is where the final processes are complete. This can be painting, clean up, fence installation and so on.
At each stage, an inspector will need to go by to assess the progress of the build. Typically during this time, a lender will charge interest only, and once the build is complete, you need to convert the loan to a standard mortgage.
The documentation that is required for a construction mortgage can be more in-depth than the paperwork needed for standard types of mortgages. On top of the typical verifications such as employment and down payment confirmation, a lender will require the builder purchase agreement, plans, permits, and more.
By knowing the different types of mortgages available, you can make better decisions on finding the one that best fits you. Mortgage brokers in Ottawa can help review your needs and find you the best solution.
An Ottawa mortgage broker not only has access to the best mortgage rates in Ottawa but many different types of mortgages from banks, credit unions, private lenders and more. I’ve worked with many clients over the years with various needs and qualifications regarding their mortgage applications. I can help you better understand your options and ensure you are aware of all the details, terms, and conditions before moving forward with this kind of loan. Contact me for your mortgage needs.
Andrew Thake is a seasoned mortgage broker with over 15 years of industry experience. He’s assisted more than 2,200 clients in finding their ideal mortgage solutions. Recognized for his excellence, Andrew has received high honours and awards, including the National Rookie of the Year from TD Canada Trust and recognition as a Top 10 Ottawa Mortgage Broker in 2023. He has also been inducted into the Hall of Fame at Dominion Lending Centres and has consistently received their Platinum Award during his tenure as a mortgage broker.
Andrew’s dedication lies in serving his clients and prioritizing their needs with an empathetic approach. Throughout the application process, he provides tailored, informed, and efficient services to ensure the best mortgage solutions for his client’s unique circumstances. The best part of Andrew’s job is when he gets to see the joy on his clients’ faces following their mortgage approval.