A conventional mortgage is a mortgage for less than 75% of the lower of the purchase price or the appraised value of the home. A High-Ratio mortgage is typically for more than 75% of the purchase price or the appraised value. High-Ratio mortgages by law, have to be insured either through CMHC or GE Capital Mortgage Insurance Canada. This insurance protects the lender against default from the borrower. The borrower pays an insurance premium as well as appraisal, legal, and application fees. The insurance premium can be added to your mortgage and amortized over the life of the mortgage, or paid up-front. The appraisal, legal and application fees must be paid in advance. The table below will show you the applicable insurance premiums for home purchases for closed mortgages based on various loan to value ratios:
|
Loan to Value Ratio
|
Premium Rate
(% of Mortgage Amount) |
|
Up to 65%
|
0.50%
|
|
65.01% - 75%
|
0.65%
|
|
75.01% - 80%
|
1.00%
|
|
80.01% - 85%
|
1.75%
|
|
85.01% - 90%
|
2.00%
|
|
90.01% - 95%
|
2.75%
|
Closed vs. Open Mortgages
Closed mortgages are set for a certain period of time called a term. For this time period, the interest rate is fixed and a penalty is usually incurred should you wish to pay off your mortgage before the term expires. Penalties vary depending on your mortgage document, but are usually the greater of three months interest payments or an interest rate differential calculation. Also, keep in mind most lenders have "Prepayment Privileges" with their closed mortgages. This allows you to pay off your mortgage faster by making higher or extra payments on your mortgage, which are applied directly against the principal amount outstanding on your mortgage. These prepayment privileges vary from lender to lender, so it is important to research which one has the right package for your needs. Open mortgages let you pay off your mortgage at any time within the term, but usually have a higher interest rate associated with them.
Fixed Rate vs. Variable Rate Mortgages
Fixed rate mortgages have a constant interest rate for the duration of the term. This is a benefit for budgeting purposes as you will know exactly what your mortgage payment will be for the term of the mortgage. Mortgage terms can be from as short as 6 months to occasionally as long as 25 years. Therefore, it could be possible to have a mortgage where your payment never changes until it is totally paid off. Variable rate mortgages change with market rates (usually with the prime lending rate). Many variable rate mortgages allow the borrower to convert to a fixed rate mortgage. Therefore, if you believe interest rates will be increasing, you can lock in to a fixed rate mortgage at today's rates. Variable rate mortgages offer a borrower the ability to take advantage of a falling interest rate environment, while still having the comfort of knowing they can lock-in to a fixed rate mortgage should rates be on the rise. Care must be exercised when choosing a variable rate mortgage to ensure that you are comfortable handling fluctuations in market rates.
Short-term vs. Long-Term Mortgages
For this decision, we all wish for a magical crystal ball. Short-term mortgages can be beneficial if you believe interest rates will decrease in the near future and you wish to take advantage of the lower rates. However, you could find yourself in a situation where rates have increased and you are now stuck with a higher rate. Long-term rates are beneficial if you believe rates will increase and you want to protect yourself from higher rates and lock-in at today's lower rate. Long-term mortgages also let you budget easier as you will know what your mortgage obligations will be for a longer period of time.
Portable and Assumable Mortgages
These two features could become important if you decide to sell your home. A portable mortgage allows you to take your mortgage with you when you sell your current home and buy another one. An assumable mortgage allows the buyer of your house to assume your mortgage, subject that they meet the lender's qualification criteria. This could be a great selling feature if your mortgage bears an interest rate that is below market rates at the time of your sale. Every lender has different features available. It is best to inquire with your mortgage consultant to see what features are available from various lenders.