Learn About – Types of Mortgages
Most of us do not have enough money in our banks to purchase a property in cash. Therefore, we enter into mortgage plans, under which we do an agreement with a bank or private lender who lends us the money, but charges an interest rate. In exchange they register the mortgage on the property until the time all the debts on account of the mortgage are paid off.
The two basic elements in a mortgage are:
- The amount borrowed, which is called the Principal Loan Amount.
- The cost of borrowing the money, which is the interest rate.
Generally the idea is to minimize the loan amount so that you don’t pay a lot of interest. Recently the mortgage interest rates have been quite low, and there are various mortgage plans one can choose from. The following are key points on the different types of mortgages.
Open mortgages usually have short terms; minimum of 6 months and maximum of 5 years. Within this time frame, the total payment has to be made. You have the flexibility of making the payments anytime, and choosing the amounts that you will pay. Therefore you can pay in parts or in full without attracting any penalties.
Normally the interest rates are higher for open mortgages than closed mortgages; usually 1% or higher than a closed mortgage. This is because of the uncertainty faced by the lender about when and how much of the payment he/she can expect.
These are good options if you are expecting a large inflow funds in the near future from an inheritance, divorce settlement, or perhaps the sale of another property.
These mortgages usually range from 6 months to 10 years. Generally, you cannot make prepayments without attracting penalties, however a few lenders do allow prepayments and lump sum payments up to a certain amount (this will be outlined in the commitment).
Interest rates are lower as the lender has security about the amount and the intervals of payments. This is a more stable option as it has a lower interest rate making it a more attractive option for the average homeowner, who may have to budget their monthly expenditures.
Fixed rate Mortgages
In this kind of a mortgage the interest rates are fixed for the entire mortgage term and cannot be readjusted or renegotiated. This allows you to plan your finances on precisely how much you will be paying every over the entire mortgage term. But because of the security and stability of this plan, the interest rates are usually higher.
Variable/ Adjustable Rate Mortgages
In this type of plan, interest rates may change over time. The current market interest rates are reviewed at intervals and adjustments are made accordingly to alter the mortgage repayments. The changes can be made on the time period of the mortgage plan or the size of the payments, or maybe a combination of both.
You may choose this mortgage plan if you make a down payment which is equal to or more than 20% of the property value/purchase price. Usually such plans do not require mortgage protection insurance.
High Ratio Mortgages
When you make a down payment less than 20% of the property value/purchase price, then a High Ratio Mortgage plan is applicable. In such cases the borrower must be approved for insurance through either CMHC, Genworth or a Private Insurance Company.
Mixed Rate Mortgage
As the name implies this kind of a loan is a blend of fixed and variable rates of interest. These mortgages have varied designs and it is best to contact a mortgage broker to get specifics.
This is a flexible option but not all lending institutions offer such plans. In this plan you can change the mortgage plan without attracting penalty. For instance, if you feel that the interest rates are going to go up in the near future, you may change the mortgage plan to extend over a longer period of time. However there are restrictions regarding these plans, so be sure to discuss it thoroughly with your mortgage broker or lender.