Common types of mortgage in Canada.

Before deciding on a mortgage, you should know and understand the different types of mortgage available to borrowers in Canada.

Amortization Length vs. Terms

The amortization period is the length of time, usually in years, for you to pay off your mortgage balance completely. Typically, longer amortization period means lower interest rate and lower monthly payment amount. However, you will be paying more on interest over the entire duration of your amortization period.

A mortgage term is the length of time that you are locked into a mortgage contract with a lender. For example, if you obtain a 30-year fixed rate mortgage with the Royal Bank of Canada on a 5-year term with an interest rate of 2.19%, you are obligated to make mortgage payments to RBC with 2.19% interest rate for 5 years. After 5 years, you can either renew your mortgage contract with RBC (at a different rate based on the rate at the time of renewal), or switch to a different lender without incurring any pre-payment penalties. So obtaining a 30-year mortgage with a lender does not mean that you are stuck with the same lender for 30 years. Your mortgage contract will expire after the amount of years specified as the mortgage term.

Types of Mortgage

  • Fixed Rate Mortgage - This means that the interest rate will be locked for the duration of the mortgage term.
  • Variable Rate Mortgage - This means that the interest rate will fluctuate with the market changes. Your payment amounts will stay the same but you would be paying less into the principal of your mortgage if the interest rate goes up, and more into the principal of your mortgage if the interest rate goes down. There is sometimes an option to set a cap on the variable interest rate.
  • Open and Closed Mortgage - This refers to your ability to pay off part of the loan or in full without incurring pre-payment penalties. An open mortgage typically indicates no pre-payment penalties for making extra payments. An open mortgage usually comes with slightly higher interest rate.
  • Convertible Mortgage - The borrower will have the flexibility to convert the mortgage type, typically between fixed rate and variable rate.
  • Reverse Mortgage - This works very similar to HELOC, which allows you to transfer the equity of your property into cash value. This type of mortgage is typically offered to older individuals. (62+ years of age)

Pre-payment Privileges

Regardless the type of mortgage you choose, you should also pay attention to the details of your contract, especially on your pre-payment privileges. Mortgage products often allow borrowers to make additional payments towards the principal of the loan, and the most common ones are:

  • Annual Lump-sum Payments - Some lenders will allow you to make up to 10~20% of your mortgage principal a year. For example, if you are able to make lump-sum payments of up to 10% on a $800,000 mortgage, you would be able to make an additional $80,000 to the principal of your loan every single year, which will allow you to pay off your mortgage much faster.
  • Double-Up Payments - Some lenders will allow you to increase your monthly payments by up to 100%. For example, if you are currently making $1,500 in mortgage payments a month (where $1,000 goes to principal and $500 on interest), you may be able to increase your monthly mortgage payment to as much as $3,000 where $2,500 of it will go to the principal of your mortgage every month. The amount that goes to the interest will not change.
  • Monthly and Bi-Weekly Payments - If you are currently making $1,500/month in mortgage payments, by switching to bi-weekly payments of $750, you will end up paying $19,500/year instead of $18,000/year. This is an easy way to pay off your mortgage a little faster. Double-Up and Annual Lump-sum Payments are still the fastest options to speed up paying off the mortgage since the extra payments go 100% into the principal of the mortgage.

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