There are many Financial Institutions and many financing options available from each of these lenders. Below is a brief overview of the main categories of mortgages to help you consider which might best suit your needs. There are many more options available than are listed here as well as hybrids of some of these categories, so talk to us to help determine what would be right for your specific situation.
Open Mortgages
If you are planning on paying off the loan within 6 months to 1 year, an open mortgage could make sense for you. For example, if you intend to sell your home soon, or are expecting a large amount of cash in the near future, an open mortgage will allow you to pay down all or part of your mortgage without any penalty However, because the lender is not guaranteed a certain minimum time period (and thus a minimum amount of interest earned) open mortgages will often come at a significantly higher interest rate than similar closed mortgages. The higher interest rate covers the overhead costs of qualifying and funding the mortgages.
When considering an open mortgage for our clients, we will compare the cost of the open mortgage’s higher interest rate for the expected length of the mortgage against the penalty of prepaying a closed mortgage that would cover the same time period to determine which is the better option. In many cases, the closed mortgage actually costs less even paying a penalty.
Closed Mortgages
A closed mortgage means that you have to pay a penalty if you wish to payout your mortgage completely during the contractual term of your mortgage. Many closed mortgages allow some prepayment and the rules around this can vary significantly, such as 10% per year on the anniversary date, or 20% per year at any time. These partial prepayment privileges vary from lender to lender and are a big part of what makes some mortgages better than others. The benefit of a closed mortgage is that they are often available at the most favourable interest rates. This may suit your needs if you do not anticipate wanting to pay out your mortgage before the term expires.
Fixed-Rate Mortgages
A fixed rate mortgage is a mortgage where the rate of interest is fixed for a specific period of time (called the mortgage term). Today, different lenders offer different terms ranging from 6 months up to 10 years. Whether you should lock in for a long term or stay short depends on the interest rate trends in the market, as well as your financial situation and degree of risk tolerance.
Most fixed-term mortgages allow you to make partial prepayments towards the principal balance during the term; however these privileges vary from lender to lender. We will assist you in making the best decision and can set you up on an accelerated payment plan that can save you thousands of dollars in interest.
Variable-Rate Mortgages
A variable-rate mortgage allows you to take advantage of the lowest rates available. The variable rate is usually tied to a lender’s Bank Prime rate. These rates are often quoted as Prime minus 1% or Prime plus 2%, etc.
Variable-rate mortgages have been attractive when market experts feel that rates will drop or stay level for a period of time. Variable rate mortgages have the downside of offering little security in a rising-rate environment and payments and interest expense can rise when the Prime Rate rises.
Cash-Back Mortgages
Cash back mortgages are becoming very popular among borrowers, particularly borrowers with limited down payments. Various lenders offer cash back programs allowing a percentage of the property’s value to be rebated to the borrower upon closing. The cash back can definitely be helpful with closing costs. Cash back mortgages do come with a higher interest rate than non-cash back options, so borrowers should be aware of the higher interest cost of using these options.
Course of Construction Mortgages
If you are building a home, we can arrange a construction mortgage for you. Typically, there are three or more disbursements made by the lender as construction of the building progresses. The lender will conduct appraisals during the course of construction and will advance funds in accordance with the appraised value of the partially completed building. Course of Construction Mortgages are often at a slightly higher rate than a standard mortgage, but the advantage is that the borrower is not paying interest on the whole amount of the mortgage at the beginning of construction. Instead, the advancing of funds as the project moves along saves interest costs, particularly where construction takes an extended period of time.
Bridge Financing
This is temporary financing that can be arranged for a variety of purposes, but generally for situations where a new home has been purchased but the old one not yet sold, or where borrows want to stay in their existing home while a new one is being constructed. Borrowers must still be able to service the debt as required by the lender.
Second Mortgages
Second mortgage financing is arranging for additional mortgage funds beyond the 1st mortgage. The second mortgage also is registered on title. Borrowers will often use a second mortgage to supplement their down payment so that they may arrange their 1st mortgage on more favourable terms. For example, most lenders will give preferred rates on loans of 75% or less of the home’s value. Borrowing additional money as a second mortgage may be at a higher interest rate, but can save a borrower money if more favourable terms can be negotiated on the 1st mortgage as a result.
Equity Lines of Credit
An Equity Line of Credit gives you access to the equity in your home, usually up to a maximum of 75% of its appraised value. The advantages are that if you need to renovate, travel, pay down other debt, etc., the rate of interest on home equity loans is generally much less than other types of personal loans and credit cards.