FIXED V.S. VARIABLE RATE MORTGAGES
FIXED MORTGAGES have one rate throughout the life of your mortgage. This option is good if you have a low tolerance for market changes and like always to know how much of your mortgage you’re paying off monthly.
VARIABLE MORTGAGES change as the Canadian Prime rate changes. If the rates change you will either pay more or less towards your principal. Variable mortgages are a good option for short term in investments, or for someone with a little risk tolerance.
BLENDED MORTGAGES are also available where a portion of the mortgage is fixed and the remainder is variable.
OPEN V.S. CLOSED MORTGAGES
OPEN MORTGAGES allow you to sell your property at any time without any penalty. This is a good option if you plan to own your property for a short period of time.
CLOSED MORTGAGES are for a fixed length of time – usually 1-5 years. Fixed mortgage rates are generally lower than those of open mortgages. If you payout your mortgage before the end of the term you may have to pay a prepayment penalty to the lender.
In recent years down payment requirements have become much more flexible. It is possible to purchase property with as little as a 5% down payment, and in some cases no money down.
To make this possible, the lender will apply for mortgage default insurance through either CMHC, Genworth or AIG and will apply the insurance premium to the balance of the mortgage. This premium protects the lender of the mortgage if you default on your payments.
The premiums can range from 0.5% to 6.6% of the mortgage balance; the higher the down payment, the lower the premium. Therefore, dow n payments of 5% would have a higher premium, and down payments of 20% would have a much lower premium. The option of purchasing property with less than a 20% down payment has helped make property ownership a realistic option for many Canadians.
Purchasing a home with a down payment or 20% or more usually avoids the additional cost of mortgage default insurance.