Real Estate Topic: Understanding Your Mortgage Options

Real Estate Topic: Understanding Your Mortgage Options


To help people make an informed decision, Canada Mortgage and Housing Corp. (CMHC) offers the following answers to some of the most common questions Canadians have about choosing a mortgage:

What is the difference between conventional and high ratio mortgage?

A conventional mortgage is a mortgage loan up to a maximum of 80 percent of the lending value of the property. This means that the homebuyer has made a down payment of at least 20 percent of the purchase price or market value of the home. If your down payment is less than 20 percent of the purchase price, however, you will typically need a high ratio mortgage. A high ratio mortgage is a mortgage loan which is higher than 80 percent of the lending value of the property up to a maximum of 95 percent. High ratio mortgages normally have to be insured (by CMHC, for example) against payment default

What are fixed, variable or adjustable interest rates?

When you choose a mortgage, you have to decide whether you want the interest rate to be fixed, variable or adjustable. A fixed rate is locked-in for the entire term of the mortgage. With a variable rate, the payments remain the same each month, but the interest rate fluctuates based on market conditions. For adjustable rate mortgages, both the interest rate and the mortgage payments vary based on market conditions. Talk to your mortgage professional to find out which option is right for you and be sure to evaluate the impact of an increasing interest rate on your monthly payment.

Should I choose an open or closed mortgage?

With a closed mortgage, you pay the same amount each month for the entire term of the mortgage. Some flexibility to repay principal through lump-sum payments is allowed. Closed mortgages can be good choice if you want a fixed payment schedule, and you don’t plan on moving or refinancing before the end of the term. An open mortgage allows you to make a lump-sum payment any time. This type of mortgage can be paid off prior to maturity without penalty. An open mortgage can be a good choice if you’re planning to sell your home in the near future, or if you’re planning flexibility to make large lump-sum payments. An open mortgage generally carries a higher interest rate.

What about the term, amortization and payment schedule?

The term is the length of time (usually from six to 10 years) that the interest rate and other conditions of your mortgage will be in effect. Amortization is the period of time (most first-time homebuyers choose 25 year amortization) over which your entire mortgage- usually either monthly, bi-weekly, or weekly. Accelerated payments are also an option. There are available for weekly and bi-weekly payment schedules and are generally equivalent to one extra monthly payment per year. With accelerated payments, the homeowner is able to pay off his/her mortgage faster while decreasing the overall interest cost.