Understanding Mortgages

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When selecting a mortgage, it's important to understand two key attributes – the type and rate. Choosing the best type and rate for your situation can end up saving you a lot of money.

Let’s start with understanding the three common mortgage types – these include closed, open and convertible mortgages.

  1. Closed Mortgage
    This type of mortgage usually cannot be changed, regardless of the term you agree to. Prepayment costs will apply if you payout, renegotiate, or refinance prior to the end of term. The bottom line – you'll pay for it later if you want to change anything.

    Benefits of closed mortgages:

    • Offers lower rates than open or convertible mortgages
    • Allows you to make an annual prepayment of up to 10-15% of original amount
  2. Open Mortgage
    This type of mortgage may be repaid, in part or in full, at any time during the term without any prepayment costs. The bottom line – if you want flexibility, this one's for you.

    Benefits of an open mortgage:

    • Offers flexibility until you're ready to lock into a closed term.
    • Allows you to pay off any (or all) of the mortgage without prepayment costs.
  3. Convertible Mortgage
    This type of mortgage offers the same security as a closed mortgage, but can be converted to a longer, closed mortgage at any time without prepayment costs.

    Benefits of a convertible mortgage:

    • Offers security and flexibility, allowing you to convert into a longer closed term mortgage without prepayment costs. This becomes relevant if you think that rates will rise in the future.
    • Enables you to make an annual prepayment of up to 10% of your original mortgage amount.

Now that we've covered the various mortgage types, let's take a look at rate types. There are two interest rate types that are commonly used in Canada – fixed rates and variable rates.

  1. Fixed Rate
    Description: an interest rate does not change during the entire mortgage term.

    Benefits of a Fixed Rate Mortgage:

    • You're able to take advantage of the same interest rate for the entire term, with a regular payment that remains constant.
    • You'll have the peace of mind knowing exactly how much your payments are and how much of your mortgage will be paid off at the end of your term.
  2. Variable Rate
    Description: an interest rate that will change in accordance with the prevailing market prime rate during the mortgage term.

    Benefits of a Variable Rate Mortgage:

    • Historically, variable rates have been lower than fixed rates and may save you money.
    • If rates do in fact go down, a larger portion of your payment goes towards principal, helping you pay off your mortgage quicker.
    • Your regular payment stays the same even if rates change.