Variable Rate Mortgage – this is a mortgage that floats with Prime. The Key Overnight Rate as set out by the Bank of Canada dictates the Prime Rate. For people with excellent credit and job history, you can usually get at least .50% below prime. These are commonly 5-year terms.
Open Variable Rate Mortgage – this is a very desirable mortgage, being that the rate is usually discounted off prime as well. You can get a product based on the prime rate with no discount on this fully open 5-year product. Again, fully open with no penalties for early payout.
Closed Fixed Rate Mortgage – this is the most common type of mortgage that people get. They can come in various terms, such as 1, 2, 3, 4, 5, 7, 10, 15, or even 25-year terms. This does not mean you will have your mortgage PAID within that time, it simply means you can renegotiate your rate and new term, when that term matures.
If you sell your property OR wish to refinance with another lender in the middle of one of these terms, you will be subject to an early payout penalty. Your penalty will be dependent upon the conditions in your mortgage commitment at the time you signed. Call your existing lender, if you wish to find out what your penalty may be.
Open Fixed Rate Mortgage – the interest rates on these mortgages are usually VERY high, but they allow you to get out without any penalties whenever you like. Most people use these mortgages for very specific short term needs.
HELOC’s or Home Equity Lines of Credit – HELOC’s are quickly becoming one of the most requested mortgage types. Using your property as security, the lender will loan up to 90% of the value of your property in the form of an actual line of credit. Half of the mortgage amount will be a fixed portion based on the current five year discounted rate, and the other half will be a true HELOC. This will be registered against your title, and you will be able to access these funds, and pay them back again at your leisure, without any penalties. Rates on HELOC’s are typically at PRIME, however, if it is for a rental property or second home, the rate may be PRIME +%.
Typically, the lender will payout your first mortgage entirely, leaving you with a combination payment of fixed and an interest only payment per month. It is up to you how much you wish to pay over the minimum required amount on the HELOC. This is also a viable source of down payment for the purchase of other revenue properties.
Extended Amortizations – you can now get an extended amortization up to 40 years. What this does is enable you to afford a more expensive property initially, and thus allowing you to acquire a property more likely to appreciate quicker as well.
This is used predominantly for people in their first, or second properties who are not concerned with ever paying off their mortgage. Once you get into your ‘forever’ home, your goals will be to pay off the mortgage, and a lower amortization is often suggested for that scenario. Some people will still take advantage of qualifying for “more” home with an extended am, especially when they have found their “forever” home. Most lenders offer pre-payment options up to 20% of the original mortgage amount once per year, plus the ability to increase your monthly payment by 20%.
At the end of your first term, whether that is 3, 5 or 7 years, you can always request a lower amortization. A 40 year amortization in no way means you have to take 40 years to pay off your mortgage. This is a very large misconception in Canada today.
I will be happy to discuss this topic or any other with you. Simply drop me an email or call me today to discuss!