Types of Mortgages in Canada

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Navigating mortgages in Canada can be overwhelming. There are many different options that may cost you thousands of dollars. This guide will help you understand the difference between mortgages. Additionally, it will help you find the best type of mortgage for your goals.

There are many types of mortgage options available in Canada. These include: LTV ratios, fixed rates, closed payments and more. We'll explore all these options below.

When you buy real estate in Canada, you are required to pay a down payment ranging as low as 5% to 20% of the purchase value. Loan to Value (LTV) is the opposite of your down payment percentage. It is the percentage of the property value your mortgage lender is providing. For example, a 5% down payment would have a 95% LTV, a 20% down payment has an 80% LTV, and so forth.

When your LTV ratio is above 80%, meaning below a 20% down payment, your mortgage is considered to have a high ratio. Your down payment provides a safety cushion to your mortgage lender in the event they need to sell your property due to default. As a result, a high ratio mortgage is riskier to your lender because the lower down payment provides less safety cushion. If your LTV exceeds 80% (less than 20% down payment), you will need mortgage default insurance, explained in the next section.

If your LTV is below 80% (above 20% down payment), your lender has more safety cushion, so you will not need mortgage default insurance. You will have a low ratio mortgage, which doesn't need mortgage default insurance. This is also known as a conventional mortgage. To clarify, a low ratio mortgage is the same as a conventional mortgage because the down payment is greater than 20% (below 80% LTV).

As mentioned previously, if you have a high ratio mortgage (below 20% down payment, above 80% LTV), you will need CMHC mortgage default insurance. The purpose of this insurance is to protect your lender if you default on your mortgage. The Canadian government enforces this insurance to ensure the financial system is stable.

There is less risk for your lender with this insurance because it guarantees payment if you stop making monthly mortgage payments. Due to the lower risk, you'll receive the lowest mortgage rates with mortgage default insurance (and a lower down payment requirement).

However, there are rules to qualify for mortgage default insurance in Canada. For example, the property purchase value can't exceed $1 million, there's a maximum amortization of 25 years, and you must meet minimum credit score requirements . If you do not meet these requirements, you won't be able to make a down payment of less than 20%. This means you will need a conventional mortgage if you don't qualify for CMHC insurance.

As with any insurance, there is an added cost. In Canada, mortgage default insurance costs vary depending on your down payment percentage. However, the lower mortgage rates you receive often negate these added costs.

Best 5-Year Fixed Mortgage Rates in Canada

Select Mortgage Term:

1-Yr

2-Yr

3-Yr

4-Yr

5-Yr

Fixed

Variable

See More Rates

While amortization is the total number of years you are set to pay off your mortgage balance, mortgage term refers to the duration for which a mortgage contract is valid. At the end of each term, you must renew your mortgage and renegotiate the contract for another term that typically lasts for five years. This means that throughout a 25-year amortized mortgage, you will have five terms of five years and four re-negotiations. However, you may also change your term to a shorter or longer length, ranging between 6 months and 10 years.

For example, you can have a ten-year term that locks in your fixed rate for a decade. Additionally, you can have a three-year term, meaning you'll have to renegotiate more frequently. A three-year term could be beneficial if you expect your financial situation to improve soon and can renew or refinance at a lower rate.

Mortgages in Canada can be fixed or variable. This is a source of confusion for many first-time home buyers in Canada. Here's a quick explanation:

• Fixed-rate mortgages have a constant interest rate over the life of your term. The rate does not change, meaning your monthly mortgage payments stay the same. Mortgage rates for fixed-rate loans are often higher than those for variable-rate loans; however, this is not always true.
• Variable-rate mortgages fluctuate with market interest rates. Variable rates rise and fall with the prime rate, which is influenced by the Bank of Canada (BoC) rate. Variable rates are typically the prime rate, plus or minus a percentage depending on your creditworthiness. If the BoC interest rate rises, your variable interest rate will also be affected. If you have an open mortgage, then your payments will also increase.

Variable-rate mortgages tend to have better interest rates during periods of prolonged low rates. This is because you expose yourself to the risk of your payments increasing with rising rates. This risk is also known as interest rate risk.

In general, it's best to choose a fixed-rate mortgage when you expect interest rates to rise over the next few years. This is because when the interest rates rise, your variable rate mortgage payments will also increase. Additionally, you may consider extending your term to lock in the low interest rates for a longer duration. For example, if you expect interest rates to rise over the next ten years, you should seek a fixed-rate ten-year term to lock in today's low rates for the next ten years.

The opposite is true when you expect interest rates to decrease. Decreasing interest rates are best for variable-rate mortgages because your payments are lower, whereas fixed-rate payments stay the same.

An open mortgage means you can make prepayments toward your mortgage balance without penalty. The name open mortgage can be thought of as suggesting open to prepayment. The other option is a closed mortgage, meaning there are prepayment penalties. Typically, you can only pre-pay 10%-20% of the principal balance each year with a closed mortgage. Any additional payments on a closed mortgage will attract penalties.

Open mortgages allow you to pre-pay your mortgage and save money. They are beneficial for those who want to sell their home soon or pay off their mortgage quickly. In contrast, closed mortgages benefit those with lower interest rates that they don't want to lose by paying off their balance early.

Another important aspect of Canadian mortgages is whether you want a new, renewal or refinance mortgage.

• New Mortgages: A new mortgage means you do not have any existing mortgage and are applying for a new one. Typically, these mortgages are for first-time homebuyers.
• Renewal Mortgages: As mentioned previously, you must renew at the end of the mortgage term. A renewal typically means you have the option to change some characteristics, such as a fixed vs. variable rate, open vs. closed, and other options mentioned in this article. Some lenders may also automatically renew your mortgage at the end of your term, but this could prevent you from getting the best rate. You may even renew with other mortgage lenders to get a better interest rate. However, there are penalties for renewing your mortgage before the term ends. There are many tips on renewing your mortgage, explained in our article on the subject.
• Refinancing: A mortgage refinance means you are making significant changes to your initial mortgage agreement and need a replacement mortgage. This is different than a renewal mortgage because a renewal means you are making minor changes. Examples of significant changes include changing your amortization period, cashing out your home equity, or any changes before your term is over. You may even be able to receive cash back through switching lenders.

Almost everyone in Canada has a traditional mortgage. All of the mortgages mentioned above can be considered traditional mortgages. As you make mortgage payments, you gradually build equity in your home. After your amortization is over and you have fully paid off your balance, you own all of your home equity.

However, a reverse mortgage is the opposite - your mortgage lender pays you to build equity in your home. They are great for retired individuals who want tax-free income. Eventually, you must pay back the lender with some interest when you move or sell the home. To qualify for a reverse mortgage, you must have sufficient equity in your home. Typically, you can borrow up to a 55% LTV, must also be older than 55, and meet other eligibility criteria mentioned in our reverse mortgage article. There are three ways to receive tax-free payments from your reverse mortgage:

1. Monthly: You can receive monthly payments from your home equity. This is the most common method because retired individuals enjoy passive income to fund their lifestyle.
2. Lump-sum: Another option is to receive a large one-time payment.
3. Custom: You may also choose a combination of the two or a completely custom arrangement. For example, you may initially receive $50,000 to buy a boat and then receive $1,000 each month.

Again, it's worth understanding that these payments are tax-free and do not need to be repaid until you move from the house. Additionally, any appreciation to your home still belongs to you. This means when you eventually sell your home, any increase in value can help pay off the reverse mortgage loan.

A higher-tier lender will generally provide you with better interest rates, but they are harder to qualify for a mortgage. The stricter application process is due to more government regulations that the lenders face to become A-level. For example, Canada’s chartered banks and credit unions can be considered A-lenders. These financial institutions are federally and provincially regulated and have the most selective qualification criteria. To qualify for an A lender mortgage, you must have income stability and meet minimum credit score requirements.

If you are denied a mortgage from an A-lender, then a B-lender is your second-best option. Canadian B-lenders are somewhat regulated by the government, but not to the same extent as A-lenders. B-lenders have more flexibility and offer innovative mortgage products, such as an interest-only term. You may even receive a better interest rate from a B-lender than a Big 6 bank in Canada; however, this is not always the case.

A C-lender, otherwise known as a private mortgage lender in Canada, has the easiest approval process. However, private mortgage interest rates tend to be higher. These institutions pool money from various investors and are not regulated by the government. You may require a private mortgage lender if your credit score is below 600. In general, private mortgage lenders should be used as a stepping stone while improving your financial situation. At the end of your C-lender term, your goal should be to qualify for a B or A-lender.

If your goal is to buy a home for the first time in Canada, two mortgages are designed to meet your needs; a Conventional/Low-ratio or a high-ratio mortgage. You can receive a conventional mortgage if you have enough of a down payment saved up. Otherwise, high ratio mortgages allow you to buy a home with a down payment as low as 5%-10%. There are other variations depending on your financial situation:

• If you work for yourself, you can receive a self-employed mortgage
• There is bridge financing if you need to buy a new house before selling your old home.

If you already own a primary residence and want to purchase an investment property, there are multiple ways to leverage your current home. In most cases, you can use the home equity of your primary residence to fund the down payment of your secondary residence. The best tools to do this include a HELOC or Cash-out refinance.

If you do not own a primary residence and want to buy an investment property directly, you can use a high ratio mortgage with CMHC insurance as long as you live in one unit. You must also follow the CMHC rules.

There are construction loans if you want to finance renovations or build a new property. For more significant investment properties, such as commercial real estate, you can receive a commercial mortgage to fund the purchase. Finally, there are even mortgages to buy land in Canada, which you can then use a construction loan to develop.

Retired individuals typically have lots of home equity and want income. The two main options for this are reverse mortgages and a home equity line of credit. The difference between these two choices is that you must make monthly payments on HELOC draws whereas you only need to pay back a reverse mortgage when you move. However, the interest rates for reverse mortgages are higher than HELOC rates.

Mortgages have been around in Canada for centuries, where land was used as collateral for loans. There were no banks or other lending institutions at that time - the only way to get a loan was to go directly to a wealthy individual or merchant.

The first mortgages were very informal, and there was no standard contract. Lenders would often take possession of the property if the borrower failed to repay the loan. Borrowers would also often default on their loans, leading to many properties being seized by lenders.

In the 1870s, the Canadian government began to get involved in the mortgage market. They created the first land registry system, making it easier to track mortgages and find people who had defaulted. This helped establish trust between lenders and borrowers, leading to the creation of banks, which would become the primary source of secured loans in Canada.

These days, almost all lending is done through banks or other financial institutions. People borrow money from these companies to purchase houses or other properties. Mortgages are the most popular financial product to buy real estate worldwide.

Mortgages are a huge part of the Canadian real estate market, and there are many different types to choose from. Whether you're looking to buy a home for the first time or want to invest in property, there's a mortgage that will fit your needs. We've outlined the most common mortgages in Canada and explained how they work. However, almost all Canadian mortgage lenders require you to get home insurance. So, whether you're a first-time home buyer or an experienced investor, be sure to read this guide before you start shopping for homes.