Are you thinking of buying a home in Canada? If so, you may be looking into the different types of mortgages available to you. Choosing the right mortgage is an important decision, and understanding your options can help you make an informed decision that fits your needs.
Fixed-Rate Mortgages
A fixed-rate mortgage is the most common type of mortgage in Canada. With a fixed-rate mortgage, the interest rate remains constant for the duration of the loan, usually ranging from 5 to 10 years. This type of mortgage is attractive for its predictability, as you can easily calculate your monthly payments since the interest rate won’t change.
Variable-Rate Mortgages
In contrast to a fixed-rate mortgage, a variable-rate mortgage has an interest rate that can fluctuate. The rate is usually tied to the Bank of Canada’s prime rate, so if the prime rate increases, your interest rate and monthly payment will also increase. However, the opposite is also true: if the prime rate decreases, your interest rate and monthly payment will decrease as well.
The appeal of a variable-rate mortgage is that it can offer a lower interest rate than a fixed-rate mortgage. However, there is also a higher level of risk, as the interest rate can suddenly increase.
Low-Interest-Only Mortgages
Low-interest-only mortgages are a type of mortgage that allows you to make interest-only payments for a certain period of time, usually up to five years. During this period, you won’t have to make any principal payments. This can be a great option for those who want to buy a home but need a few years before they can start making payments on the principal.
Interest-only mortgages come with some risks, however. If you don’t make payments on the principal after the interest-only term ends, you could end up owing more on the mortgage than when you started.
High-Ratio Mortgages
High-ratio mortgages are mortgages where the loan-to-value ratio is more than 80%. This means that the amount you borrow is more than 80% of the value of the home. These mortgages require mortgage default insurance, which is usually provided by the Canada Mortgage and Housing Corporation (CMHC).
High-ratio mortgages are available to those who don’t have a large down payment saved up. However, this type of mortgage comes with some additional costs in the form of mortgage default insurance premiums.
Combination Mortgages
Combination mortgages are a type of mortgage where you can combine the features of a fixed-rate mortgage and a variable-rate mortgage. For example, you could have a combination mortgage with a five-year fixed-rate period and then switch to a variable-rate mortgage after the fixed-rate period ends. This type of mortgage can offer the best of both worlds, allowing you to take advantage of a lower interest rate while still providing some predictability.
No matter which type of mortgage you choose, it’s important to do your research and understand the pros and cons of each. Taking the time to understand your options can help you make the best decision for your situation.
