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Mortgage Types


OPEN MORTGAGES

If you want to make large payments on your mortgage or pay off the entire mortgage without penalty, then an open mortgage is for you. An open mortgage offers maximum flexibility. These homeowners are willing to accept some fluctuation in the interest rate for the flexibility of paying off part or the entire mortgage before the term is complete.

CLOSED MORTGAGES

A closed mortgage is a commitment with a pre-determined interest rate, over a pre-determined period of time. A buyer who uses a closed mortgage will likely have to pay the lender a penalty if the loan is fully paid before the end of the closed term.

With a closed mortgage, the borrower may select a fixed rate or variable/adjustable rate depending upon their needs or preference. See “Rates” for more information on the types of rates.

Closed mortgages generally have lower interest rates than open mortgages. Most lenders will allow borrowers with closed mortgages to make a lump sum payment of up to 10, 15 or 20% of the original mortgage amount once a year without penalty. This payment goes directly toward paying down the principal of the amount owing. Many lenders will also allow a borrower to increase the mortgage payment by up to 10, 15 or 20% as well as allowing the lump sum payment.

CONVERTIBLE MORTGAGES

A convertible mortgage is an agreement made at the beginning of a term that allows homeowners to change the type of mortgage they hold during its term. If a homeowner wants to start with an open mortgage and then lock into a closed mortgage, a convertible mortgage is the right choice. It offers lower rates than an open mortgage and has the option of switching to a closed term. A conversion to a fixed rate mortgage can also be done by most lenders when the borrower has originally selected a variable rate mortgage and now wishes to move to a fixed rate before the end of the term.

HYBRID MORTGAGES

A hybrid mortgage is a term used when there is more than one type of mortgage contained in a single mortgage registration. The registration could include a fixed rate portion, a variable rate portion, a line of credit portion, or any combination of these. Each lender will have their own unique name for this type of mortgage allowing anywhere from 2 to 100 different products contained in the registration of the mortgage. This product is often suggested for the savvy borrower who will use this as part of their overall financial plan.

REVERSE MORTGAGES

This type of mortgage allows homeowners 55 years and older to convert their home equity into either a lump sum payment or monthly cash payment(s), generally for living expenses. A homeowner’s equity is drawn down by the lender to the homeowner – the borrower. When the homeowner no longer wishes to occupy the property as their principal residence, or upon the death of the borrower, the loan balance is due. The balance of the loan is settled from the proceeds of the sale of the property either by the owner themselves or their heirs.

Insurance

MORTGAGE LOAN INSURANCE

Mortgage Loan Insurance helps protect lenders against mortgage default and enables consumers to purchase homes with a minimum downpayment of 5%. The amount of the insurance premium depends on the amount borrowed from the lender.

Mortgage loan insurance premiums can be paid in a lump sum or be added to your mortgage and included in your monthly mortgage payment. For more information, talk to your mortgage professional, or contact a Mortgage Loan Insurance provider.

Current mortgage loan insurance providers are:

The Federal Department of Finance has made a number of changes to promote more conservative lending practices on government-backed insured mortgages.

Measures include:

  1. All insured mortgages need to be qualified using a stress test at whichever is greater of either the Bank of Canada benchmark rate (currently 5.14%) or the contract rate offered on the homebuyer’s commitment; 
  2. Maximum amortization of 25 years;
  3. 5% down payment is required if the property value is less than $500,000, although purchasers can borrow towards this amount;
  4. If the property value is greater than $500,000, the portion above the $500,000 will require a down payment of 10%. Ex. A property purchased for $750,000 will require a down payment of $25,000 for the first $500,000 and then an additional $25,000 for the $250,000 over the $500,000. This means a total down payment of $50,000.
  5. Minimum credit score of 600;
  6. Previously announced limit of 44% for total debt servicing replaced with a ‘principles’ based approach;
  7. Enhanced documentation requirements including income verification and up to date appraisals;
  8. Lowering the maximum amount that Canadians can borrow in refinancing their mortgage to 80% of value of the home;
  9. Properties with a value over $1 million do not qualify for mortgage default insurance;
  10. Properties purchased for investment/rental purposes, do not qualify for default insurance;
  11. Withdrawing government insurance backing on lines of credit secured by homes such as home equity lines of credit (HELOCS).

MORTGAGE LIFE INSURANCE

Mortgage Life Insurance is designed to protect your family from the financial burden of paying off your mortgage in the event that something should happen to you. It is a life insurance policy that pays the balance of your mortgage to the lending institution.

TITLE INSURANCE

When you buy a home, you are buying title to the property. Title insurance protects that property. It is an insurance policy covering the condition of title or ownership of your property and is used to provide ownership protection against losses or damages suffered as a result of title problems.

Title Insurance provides the purchaser with coverage against title risks inherent in real estate transactions (including title fraud) for as long as you own your home.

For more information, talk to your mortgage professional, or contact the following Title Insurance providers: