Types Of Mortgages In Canada

Published on November 1, 2022

If you’re considering buying real estate, mortgages are the real deal. There are different types of mortgages in Canada to choose from. All you need to do is choose the one that sits well with you.

Mortgages are secured loans to purchase fixed assets/properties like a house. Where the lender isn’t pleased with the manner of payment by the borrower, such assets can be seized. Mortgages can come in diverse types, including open, closed, and hybrid mortgages. Others include reverse, adjustable rates and commercial mortgages.

This article contains all you need to understand about mortgages and the different types available. This is to help you to choose the one you’re comfortable with when you’re ready to purchase a house.

mortgage types in canada - source mortgages

What are the Types of Mortgages in Canada?

There are different types of mortgages in Canada available to its residents. Your final choice depends on the agreement you wish to sign with your bank and how you want to make payments.

Below are some of the mortgage plans available in Canada.

1. Open Mortgages

An open mortgage allows you to pay your mortgage off earlier. This is helpful when you’re able to pay a large sum than determined by the mortgage payment calculator. With this type of mortgage, you are permitted to pay more to finish your payments over a shorter period.

Some mortgage plans have prepayment charges when you pay early. This is because banks usually don’t want to end the mortgage before time as they risk lower profits from interest. However, an open mortgage gives the freedom to make payments of higher amounts without penalty. This helps renew your home loan terms.

2. Closed Mortgages

This is different from open mortgages as they don’t allow you to end your mortgage earlier than the expected time. They also require you to pay a prepayment fee if you eventually decide to pay your mortgage before the due time. In Canada, closed mortgages are more popular than open mortgages because they offer lower interest.

Therefore, you should consider the prepayment fee and lower interest rate when using a home loan calculator.

3. Short-Term Mortgage

Short-term loans are personal loans you repay within a short period, usually within 6-12 months. This loan is usually taken to handle unforeseen expenses such as home/vehicle repairs, emergency medical bills, etc.

It is important to note that securing a short-term loan with a low credit score can be a chance to increase your score. Therefore, before committing to the mortgage, use a credible mortgage calculator. This way, you’ll know exactly what to expect in terms of repayment and can plan accordingly.

4. Long-Term Mortgage

Long-term loans are unsecured loans that you repay for more than one year. This loan allows you to spread out your purchasing cost over a long period and offers repayment in affordable monthly installments. Although long-term loans are expensive, your repayment is flexible and in small monthly installments.

5. Hybrid Mortgages

The hybrid mortgage allows you to combine different types of mortgages in Canada. This means you might decide to operate an open mortgage for a while and then switch to a closed one. Hybrid mortgages are for those with the financial knowledge of how to negotiate a more challenging mix of agreements.

6. Reverse Mortgage

This type of mortgage gives you access to your home equity. This mortgage allows you to take a loan based on your property’s general worth. This option is available only for those who own a house and have paid part of their mortgage.

7. Non-Conventional Mortgage

Non-conventional mortgages are created to help buyers with low to average incomes. This loan is meant for those whose application for a conventional loan has been declined. For non-conventional loans, the borrower will have to incur additional costs such as guarantee fees and Mortgage Insurance Premiums.

When determining possible repayment amounts, ensure you use a credible mortgage payment calculator. It’s best to find one tailored specifically for non-conventional mortgages to ensure you obtain the most accurate figures.

canada mortgage types - source mortgages

8. Home Equity Lines of Credit (HELOC)

A home equity line of credit is a loan where a lender lends a certain maximum amount within an agreed period. Here the collateral of such a loan is the property of the borrower. When the borrower fails to repay the loan, the lender will be left with the option of selling the asset used as collateral.

9. Fixed-rate Mortgage

A fixed-rate mortgage has its interests fixed for the period of the mortgage. Unlike the adjustable-rate mortgage, its rate doesn’t change with market changes. Although it offers high interest and prepayment penalties, a fixed-rate mortgage is Canada’s best type of mortgage.

Lenders and borrowers who don’t want irregular mortgage payments prefer this type of mortgage. Make sure you determine the current market interest rate when using a mortgage calculator. The rate you pay will be the market interest rate when you sign your contract.

10. Adjustable-rate Mortgage

An adjustable-rate mortgage is also called a variable or floating mortgage. It is a home loan whose interest rates fluctuate over time due to the prevailing interest rate. Corporate bonds, mortgages, credit cards, and derivatives offer adjustable interest rates.

Due to the ever-changing market interest rate, it can be difficult to project your monthly repayment amounts over the long term. But a good home loan calculator should be able to provide a decent estimate to help you plan.

11. Commercial Mortgage

Commercial mortgages are funds that private lenders give to investors who need quick finance. Unlike traditional loans with high-interest rates, the criteria to qualify for commercial mortgages are flexible. Speed and flexibility are the significant advantages of this mortgage. This is one of the types of mortgages in Canada offered by Spring Mortgage.

12. Debt Consolidation Mortgage

For those with credit, personal, car, or retail payments to pay off, a debt consolidation mortgage helps combine debts and make your financial situation more manageable. The interest that accumulates from these streams can be a problem for your finances. Therefore, you need a debt consolidation mortgage. Spring Mortgage is a great place Canadian residents can get a debt consolidation mortgage.

Conclusion

There are different types of mortgages in Canada to choose from, as mortgages form a big part of Canada’s real estate market. One thing you should have in mind is whatever your need is; there’s a mortgage plan that suits it. Whether it’s property investment or you want to purchase a house.

Before you begin the purchase of houses, read this article to get an in-depth knowledge of mortgages. This is because Canadian lenders will need you to get home insurance either as an experienced investor or a first-time buyer.

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FAQs about the Types Of Mortgages In Canada

What type of mortgage do I choose?

Choosing mortgages can be relatively confusing, even though it isn't supposed to be so. All you need to do is find the one that works with your budget and fits your purpose. No matter what your preferences are, there are many mortgage financing alternatives for you to choose from.

How do mortgages work?

A mortgage is a loan used to buy a house. Many people don't have the funds to buy houses outrightly, therefore, resorting to financial institutions for this loan. Although mortgages are different, they have some similarities you should be aware of.

What is the most common type of mortgage?

Conventional mortgages are one of the most common types of mortgages in Canada. Here you can purchase a house with as low as a 3% down payment. They have strict rules as regards your credit score and debt-to-income ratio.

What is the best type of mortgage to get in Canada?

When it comes to the best type of mortgages in Canada, fixed-rate mortgages are more accepted by buyers who do not want irregular mortgage payments. However, fixed-rate mortgages offer high interest and prepayment penalties.

What is the shortest mortgage term you can get in Canada?

Short-term mortgages are usually 3 years or less, with six months being the shortest you can get. Those with an open mortgage usually need a short-term solution and can switch to a longer-term mortgage later.