One of the major decisions that anyone will have to make in their life is to purchase a house of their own. It is often a once in a lifetime opportunity and thus requires careful thought prior to making any final decision or choice. In Canada, there are different types of available mortgages and buyers need to understand what they are and their differences in order for them to take advantage and reap their intended benefits.
Here are the available property loans in Canada, with their corresponding detailed explanation.
The Conventional Mortgage
For those of you who have no idea what a conventional mortgage is, you can avail this loan for a purchase price or appraised value of a property that is not beyond 80%. This means to say that if you are interested in availing this property loan, the cash that you provide as a form of down payment must be 20% of the property’s current market value or its purchase price.
If you are a property buyer, you will be necessitated to make a larger down payment for the property. This will give you an immediate equity for it. For the simple reason that the buyer is given a cushion of equity, his bank is not at risk as opposed to what happens with a lower amount of down payment. Add to this, you don’t need to bother yourself with getting a mortgage insurance for a conventional or traditional mortgage.
The Canada Mortgage and Housing Corporation or the CMHC insures the high ratio mortgage. Insuring can also be done by an independent company as may be endorsed by the lender, like the Canada Guaranty. In the unlikely event that the buyer defaults on the loan, the bank will definitely have nothing to worry about since the insurance has got it all covered. There is a corresponding fee for this insurance though, and it will be charged by the insurer. The percentage of your down payment, as well as the amount of money that you are trying to borrow, will determine the amount of the corresponding fee. Normally, this would be ranging from 1.00% to 3.50% of your mortgage’s principal amount. Please note that mortgage insurance is not necessarily for your benefit, the buyer, but it is in place to benefit the bank. Should an unfortunate scenario happen that the buyer defaults, the proceeds from the insurance will be awarded to the lender and not to the borrower.
The Open Mortgage
If one of the reasons that you are hesitant in taking advantage of today’s available mortgage loans is because of the penalties that you may incur due to a default, I suggest that you take into account the open mortgage type. With an open type of mortgage, you have the liberty of making a prepayment of any amount at any given time without having to worry about any kind of compensation charges. The open mortgage comes with a higher interest rate, although, they are relatively similar with respect to their offered terms.
Closed mortgage types are known for their prepayment limits. Let us say for instance that you have an extra money and wanting to pay more for your mortgage balance. Well, you can’t since you are permitted to only pay 15% of the mortgage’s original principal balance per calendar year. If you do so, then you will run the risk of having to pay compensation charges if you elect to pay an amount bigger than 15% in a single calendar year.
The Variable Rate Mortgage
As the name of this mortgage type suggests, there is a possibility that during the term of the mortgage the interest rate would change periodically. However, in a time that there is an abrupt change in the interest rate, the borrower’s monthly payment is not impacted and thus will remain just the same. Should this kind of scenario take place, it will subsequently cause you to pay more or less of the principal for your mortgage, depending upon the prevailing interest rate. Additionally, should there be a spike in the interest rate, it is inversely proportional to the principal which will decrease instead. On the other hand, if the interest rate decreases, the principal will increase.
Some people mistakenly interchange the variable rate mortgage and confuse it with the adjustable rate mortgage. On the surface, they may look similar because their title literally suggests so, but the truth is they are not. Their main differentiating factor is their monthly payment amount with respect to the sudden increase in the interest rate. In a variable rate mortgage, your monthly payment will remain the same regardless of an increase in interest rate whereas in an adjustable rate mortgage you can expect to receive an increase in your monthly payments the moment that there is an increase in interest rate.
Capped Rate Mortgage
The capped rate mortgage can be considered as another classification of the variable rate mortgage but comes with a very significant difference. It is beneficial to property buyers in the sense that it comes with an interest rate ceiling. There is a cap or limit, and beyond that, your payments can’t go above it. Financial bodies scarcely offer capped rate and they normally use them only as introductory rates for about 3 to 5 years.
So you as the fund/money borrower from a bank or any other financial institution, what‘s in it for you in a capped rate mortgage? What are the advantages and disadvantages that you need to know?
If the interest rates are currently low, your monthly payments will be lowered, too. You receive a sense of security knowing for a fact that your monthly payments can’t go beyond a designated cap or limit. It is normally more expensive at the onset when compared to some other in offer discounted rates. You might also need to exert an extra effort when trying to find a financial body offering this type of mortgage since they are rarely available in the market nowadays.
In a capped rate mortgage, it is very important to be certain to yourself that you have the full financial capability of making maximum repayments. It is also important to see to it that you possess a flexible budget so that you can efficiently manage the fluctuating mortgage payments which may occur at any given time.
We’ll continue with more of the different types of mortgages available to Canadians today in our next post.