Different types of mortgages in Canada and how they work

A mortgage is a loan used to finance a home or other forms of real estate. The borrower enters into a mortgage contract with a lender (bank, credit union, monoline mortgage company) and agrees to repay the amount borrowed (principal) through a series of regular payments.  These payments are made of up of two components, one portion goes towards repaying part of the principal balance of the mortgage thereby reducing how much you owe the lender, and the remaining portion goes towards paying the interest that has accumulated since the last regular payment.  

The property is the collateral, often called the security, for the loan that protects the lenders interest (mortgage) in the property. These payments are made of up of two components, one portion goes towards repaying part of the principal balance of the mortgage thereby reducing how much you owe the lender, and the remaining portion goes towards paying the interest that has accumulated since the last regular payment.  

There are various types of mortgages in Canada for Canadians to choose from, as such, the information below will help inform potential homeowners about their options and how to decide which one best suit their financial situation.

Homeowners and businesses use mortgages to purchase real estate and pay the total cost over time rather than pay the full amount at the time of purchase from their own savings or investments. The borrower continues to pay back the mortgage loan (with interest) for a certain number of years, known as the amortization period, until the total mortgage amount has been repaid in full to the lender and they then own the property “free and clear”. In Canada, mortgages are usually amortized over the period of 25 to 30 years. Additionally, if for some reason, the borrower decides to stop making mortgage payments, the lender can foreclose on the home.

Canadian borrowers have a lot of things to consider when becoming homeowners and obtaining mortgages. There is the structure of the mortgage, for example, a traditional mortgage will have one account and a regular mortgage payment made up of two parts, a principal portion and an interest portion.  Listed below are a few examples of the most common types of mortgage loans available to potential homeowners. 

• Hybrid mortgage— it has multiple accounts, one like the traditional mortgage plus one or more traditional or line of credit accounts included in the mortgage that are also secured against the property. These hybrid types of mortgages will have multiple payments, one for each account.   

• Equity mortgage— in this case, payments are generally interest only or may have no payments at all like in the case of a reverse mortgage or a prepaid mortgage.   
• Fixed-rate mortgages— with this type of mortgage, the interest rate will stay constant throughout the duration of your mortgage term. As such, the borrower’s monthly payments will also remain the same. They offer predictability, stability, and an advantage if interest rates happen to rise.  
• Variable-rate mortgage— in comparison to fixed rates, variable rate terms have interest rates that change along with the prime rate they are tied to. The relationship to the prime rate will remain the same for the term. This fluctuation is out of the borrowers’ control, but even with fluctuating rates, the overall cost can be less over time than paying for a mortgage with fixed rates. This is not guaranteed. 
• Open mortgage— an open mortgage provides borrowers with flexible options concerning their mortgage repayments. If their financial situation allows them, they are permitted to pay extra towards their mortgage without any penalties. This can be done by increasing their monthly payments or paying a lump sum as per the terms of the mortgage agreement. Open mortgages have higher interest rates than closed mortgages. 
• Closed mortgage— a closed mortgage won’t give you that same flexibility as an open mortgage does when making extra payments. Check your mortgage terms and conditions for any penalties, fees or early prepayment charges if you wish to make any extra payments on a closed mortgage. However, closed mortgages usually come with a significantly lower interest rates than open mortgages.  

• Reverse mortgages— reverse mortgages are the most unique compared to the other types of mortgages. They are designed specifically for homeowners 55 years of age or older who want to continue living in their home and convert a portion of their home equity into cash they can use however they wish. The funds can be taken in a lump sum, given to them in an income stream or some combination of the two options. Almost all homeowners 55 and older will easily qualify for a reverse mortgage. 
• Interest-only mortgages— with this type of mortgage, the borrower is only required to pay the accumulated interest on a regular basis for a specified period. There is no requirement to repay the principal amount for that specified period. Two examples of this type of mortgage may be a Home Equity Line of Credit mortgage or a private mortgage.  

While shopping for a mortgage, a digital mortgage calculator can be helpful to compare the monthly estimates of different types of mortgages. These calculators will inform you about what the interest rate could be and how large your down payment will be. There are also affordability calculators that will let you know which properties are within your budget. The best option would be to work with a mortgage broker who can provide multiple scenarios for you to consider.

During the mortgage process, borrowers may miss a few steps, which results in missing out on the best deal for them. Below are a few pieces of advice that potential homeowners should remember.  

• Compare different lenders— as most borrowers don’t have time to spend hours, days or weeks looking around and assessing their options at multiple lenders, they will often leave a lot of money on the table. Working with a professional mortgage broker can save you thousands of dollars in interest and help you pay your mortgage off sooner.  
• Check your credit score beforehand— in most cases, lenders check your credit score. As such, ensure you have a good idea of your credit score before you apply; your mortgage broker can help here as well. 
• Accommodate for closing costs— homeowners often believe that the down payment is the only cost they’re required to come up with for a purchase. When making a purchase you will need approximately 1.5%-2% of the purchase price to cover, transfer taxes, appraisals, lawyer fees and inspection fees. Therefore, saving for these costs in advance could be very beneficial.

Choosing the right mortgage partner is equally as important as looking for the right home. Mortgage Maestro has a team of experienced mortgage professionals who can help you find the best mortgage solution and help you navigate the mortgage process.  

You can contact Mortgage Maestro by checking out the website or giving the brokers a direct call. Everyone on the team will work with you to better understand your financial goals.

One of the most valuable aspects of the mortgage broker’s role is negotiating with different lenders on behalf of their clients. This negotiation can lead to lower interest rates, reduced fees, or more flexible repayment terms. Throughout the lending process, mortgage brokers provide insights and advice to borrowers, explaining the different mortgage options to help them make informed decisions.