What type of mortgage works for me?
Picture of Brianna Frith

Brianna Frith

Author, Founder at Endhome

With inflation and the rising interest rate on everyone’s mind, it is guaranteed that potential homeowners have mortgages on their minds. Understanding that you may need one for your home seems like the easy part. Where to obtain one, how to finance it, and “who can help me” are the questions any homeowner should be asking. There is one more question, however, that may be the most important before you make any decisions: “What type of mortgage works for me?”

In Canada, there are many different types of mortgages available, each with different features and benefits. Depending on your situation, one mortgage type might be more favourable than another. It is always important to seek help from a mortgage professional when choosing what’s right for you. Below is a list of the most common options available in Canada, and what you might need to know.

Fixed-Rate Mortgages: A fixed-rate mortgage allows you to lock in a specific interest rate for a predetermined period, typically between one and ten years. This type of mortgage provides stability as your interest rate and payments remain constant during the fixed period. 

This means that the borrower’s interest rate and mortgage payments remain the same throughout the term of the mortgage, regardless of any changes in market interest rates.

It can provide stability and predictability for homeowners, as they know exactly how much their mortgage payment will be each month. 

However, fixed-rate mortgages often have higher interest rates compared to variable-rate mortgages, especially for longer terms. This means that borrowers may end up paying more interest over the life of the mortgage than they would with a variable-rate mortgage.

Variable-Rate Mortgages: Variable-Rate Mortgages are a type of mortgage where the interest rate fluctuates over time, based on changes in the prime lending rate set by the Bank of Canada.  

Variable-rate mortgages typically have lower interest rates compared to fixed-rate mortgages, especially for shorter terms. However, the borrower is exposed to interest rate risk, as their mortgage payment can increase if interest rates rise. This means that the borrower’s mortgage payment can change from month to month.

To mitigate this risk, some variable-rate mortgages offer a “rate cap” or “ceiling” that sets a maximum interest rate that the borrower will have to pay, regardless of any increases in the prime lending rate.

Variable-rate mortgages can be a good option for borrowers who are comfortable with some level of interest rate risk and who want to take advantage of potentially lower costs.

Open Mortgages: An open mortgage allows you to pay your mortgage in part or in full, without any penalty. This means that the borrower has more flexibility and can make lump sum payments or pay off their mortgage completely at any time during the mortgage term.

Open mortgages are often suitable for borrowers who are planning to sell their homes soon or who anticipate a significant increase in their income. However, open mortgages usually have higher interest rates than closed mortgages, which do not allow prepayments without penalty.

It’s important to note that not all mortgages are fully open. Some mortgages may have restrictions on how much or how often you can make prepayments without penalty, and some may have higher interest rates than others.

Closed Mortgages: A closed mortgage has a set term, and if you pay it off before the term ends, you will be charged a penalty. Closed mortgages typically offer lower interest rates than open mortgages. 

Closed mortgages typically have lower interest rates compared to open mortgages, which allow for more prepayments without penalty. However, closed mortgages offer less flexibility than open mortgages, and the borrower must plan carefully to avoid penalties.

At the end of the mortgage term, the borrower can choose to renew the mortgage with the same lender or transfer the mortgage to a new lender. The borrower can also choose to make changes to the mortgage, such as increasing or decreasing the amortization period or changing from a fixed-rate to a variable-rate mortgage.

Closed mortgages are a popular choice for homeowners who want a stable and predictable mortgage payment and are less likely to need to make significant prepayments during the mortgage term. 

Hybrid Mortgages: A hybrid mortgage (also known as Combination Mortgage or Convertible Mortgage) combines the features of both fixed-rate and variable-rate mortgages. With a hybrid mortgage, you can split your mortgage into two parts: a fixed portion and a variable portion.

Some hybrid mortgages also allow the borrower to convert to a fixed-rate mortgage at any time during the mortgage term, providing additional flexibility.

Hybrid mortgages can be a good option for borrowers who want the stability of a fixed-rate mortgage but also want the flexibility to take advantage of lower interest rates in the future.

Reverse Mortgages: Reverse Mortgages are a type of mortgage that allows homeowners aged 55 and over to access the equity in their home without having to sell or move out of it. Instead of making mortgage payments to the lender, the lender makes payments to the homeowner, either in a lump sum or in regular instalments.

The amount of money that the homeowner can borrow is based on the value of their home and their age, with older homeowners and homes with higher values generally qualifying for larger loan amounts.

The homeowner is not required to repay the loan until they sell their home or move out, either by choice or passing away. At that time, the loan must be repaid, usually from the proceeds of the home sale.

Reverse mortgages can be a good option for homeowners who want to access the equity in their home to supplement their retirement income, pay for home renovations or medical expenses, or make other large purchases. However, reverse mortgages often have higher interest rates and fees compared to traditional mortgages, which means that the borrower may end up owing more than the value of their home over time.

It’s important to speak with a mortgage professional to determine which type of mortgage is right for your circumstances. They can help you understand the pros and cons of each type of mortgage and help you find a mortgage product that fits your needs and goals. Look no further than our Agent Directory for a list of some of our partners that can help you understand the pros and cons of each type of mortgage as well as help you navigate the application and approval process today!