There are many mortgage products in the market today. So I’m looking to buy a home and find the options overwhelming. Especially when buying your first home, the choices and options may seem 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 mortgages are sometimes called a secured line of credit. It 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 and those who are unsure of the best option to choose 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 product 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 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 lower typically than the penalty to get out of a closed fixed-rate mortgage. With a variable rate mortgage, the penalty is usually three months of interest.
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 5-year variable rate is typical with a lower interest rate than a five-year fixed rate.
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 period of time ranges from six months up to 10 years.
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 is 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.
Learn more: 5 year fixed rate mortgage
The penalty on a fixed-rate mortgage unfrotriatnely 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 needs are a bit more time-sensitive, there are options with private mortgages and alternative lending.
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.
However, these options can come with higher interest rates and possible fees. Some alternative lending options can have amortizations of up to 40 years of interest-only payments to help offset the higher interest rates.
Many of the loans can be open as well so they can be paid off at any time.
These can be looked at as great steppingstone solutions as well for those who were not quite where they need to be financial to meet traditional bank guidelines but still want to proceed with a mortgage.
They can allow you a little bit of time to continue to get your finances in order and from there, at renewal, you can look to refinance or renew back to a traditional lender. Some of these options also require less documentation.
For those who are having trouble obtaining the documents, a lender needs this may help.
With the purchase plus improvements option, a purchaser can work up to $40,000 in renovations into their home at the time of purchase.
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 advanced to you and draw. 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 of 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 the build, a lender will charge interest only and once the build is complete, you need to convert the mortgage to a standard mortgage.
The documentation that is required for a construction mortgage can be more in-depth than the documents required for a standard mortgage. 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. Contact me for your mortgage needs.