Understanding Mortgages
Mortgage Types
There are several different types of mortgages to consider when shopping around. Ultimately, you need to find the right one for your situation. Below are explanations about each type.
Closed
This type of mortgage usually remains unchanged for whatever term you agree to. Prepayment costs will apply if you payout, renegotiate, or refinance before the end of term.
- Provides lower rates than open or convertible mortgages.
- Allows you to make an annual prepayment of up to 10-15% of your original mortgage amount.
Open
This type of mortgage may be repaid, in part or in full, at any time during the term without any prepayment costs.
- Provides flexibility until you are ready to lock into a closed term.
- Allows you to pay off any or all of the mortgage without prepayment costs.
Convertible
This is a mortgage which offers the same security as a closed mortgage, but which can be converted to a longer, closed mortgage at any time without prepayment costs. It is typically associated with fixed rate mortgages.
- Provides security and flexibility allowing you to convert into a longer closed term mortgage without prepayment costs, if you think rates will rise.
- Allows you to make an annual prepayment of up to 10% of your original mortgage amount.
Understanding Rate Types
Fixed
An interest rate that does not change during the entire mortgage term.
- You can take advantage of the same interest rate for the entire term with a regular payment that stays the same.
- You will have the security of knowing exactly how much your payments are and how much of your mortgage will be paid off at the end of your term.
Variable
An interest rate that can fluctuate during the term. The interest rate varies with changes in market interest rates (typically the bank’s prime lending rate). The mortgage payments can be fixed, or they could change if the interest rate changes – it depends on the lender and type of product.
- Historically, variable rates have been lower than fixed rates and could save you more money.
- If rates go down, a larger portion of your payment goes towards principal, helping you pay off your mortgage faster.
- Your regular payment stays the same even if rates change.
Reverse Mortgages
A reverse mortgage is a loan that is designed for homeowners 60 years of age and older. A reverse mortgage is secured by the equity in the home, which is the portion of the home’s value that is debt-free. It allows homeowners to obtain cash, without having to sell their homes.
Learn more under, understanding reverse mortgages.
- You don’t have to make any regular payments on the loan.
- You can turn some of the value of your home into cash, without having to sell it.
- The money you borrow is a tax-free source of income.
- This income dose not affect the Old-Age Security (OAS) or Guaranteed Income Supplement (GIS) benefits.
- You maintain ownership of your home.
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