6 Mortgage Options for Canadian Homebuyers

Anyone planning to buy a home soon already knows what a mortgage is. Mortgages are a loan used to pay for a home. And depending on your credit score, the credit limit and the interest rates for the loan can be extremely advantageous, or less so, for the future homebuyer. Traditionally, homebuyers borrow enough money from a bank to cover the cost of a property with the agreement that the bank may repossess the home if monthly payments are not fulfilled. The borrowing party is also required to provide a down payment. Although that's a quick overview of how mortgages work, there are several different types of mortgages in Canada, each with its own requirements, mandates, and payment options. Keep reading to become an expert on the types of mortgages offered in Canada.

For informational purposes only. Always consult with a licensed real estate professional before proceeding with any real estate transaction.

Open Mortgages in Canada

Of all the options on this list, an open mortgage provides the most flexibility to borrowers. People who choose an open loan can make payments of any size at any time. Additionally, they can refinance or renegotiate the terms of the loan at any time without penalty. Interest rates are typically higher with an open mortgage versus a closed one, and rates can change during the course of the loan.

Closed Mortgages in Canada

Closed mortgages typically have lower interest rates compared to open mortgages. These types of loans generally involve committing to the lender concerning a pre-determined rate of interest for a pre-set period of time.

However, in some cases, lenders may allow borrowers using a closed mortgage option to select a fixed or variable rate, which causes interest rates to change over time. Closed mortgage borrowers also may have to pay a penalty for paying off a loan too early. That being said, once per year, most lenders permit borrowers to make a lump sum payment up to 20% of the original loan amount penalty-free.

Convertible Mortgages in Canada

Convertible mortgages are types of loans in which the terms set at the beginning of the loan can be converted to a different type after a certain period of time. For example, some borrowers who want to start with open mortgages may lock into a closed mortgage. Conversions to fixed-rate mortgages become possible before the end of the term. If any of these situations may occur, borrowers might want to consider starting with a convertible mortgage.

Hybrid Mortgages for Homebuyers in Canada

When more than one type of mortgage is part of a single mortgage registration, they are known as hybrid mortgages. Some lenders allow anywhere from two to 100 different products in a mortgage registration. For example, this may include variable-rate portions, fixed-rate portions, a line of credit, or a combination of these or others. Hybrid loans are favoured by borrowers planning to use the purchase as a component of their overall financial plan.

Reverse Mortgages in Canada

Owners who are 55 years and older have the option to convert the home equity into monthly cash payments for living expenses, energy-efficient home improvements, or anything they choose. Reverse mortgages also give owners the option to convert their equity into a lump sum payment.

Should the borrower pass away or decide that they no longer want to own the property, the loan's balance becomes due immediately. In these circumstances, the home can be sold by an heir or the lender if there is no estate beneficiary. When owners want to get out of the loan, any sale profits go toward the loan balance. Any excess balance falls on the borrower or their heirs.

Assumable Mortgages in Canada

Assumable mortgages allow someone else to take over an owner's original loan and the property. The terms of the original loan are required to stay the same. Lenders must approve of the transition and ensure the assumer can afford the home, as payments will still go to the financier. Variable-rate mortgages don't qualify for assumable mortgages, but most fixed-rate loans can be assumed.

Which Mortgage Is Right for You?

Anyone interested in buying a home in Canada will want to speak to their financial institution or mortgage lender about these options for more assistance in finding the best one for their situation. Whether you're buying a new construction home or a sleek condo, choosing the right mortgage will make the process easier.

For informational purposes only. Always consult with a licensed real estate professional before proceeding with any real estate transaction.