If you’re in the market to buy a home, you’ve probably already realized that there are many types of mortgages available. Choosing the right one can significantly affect your monthly payments, total interest paid, and even your ability to qualify. Whether you’re a first-time homebuyer or a seasoned investor, understanding the different types of mortgages is key to making an informed decision.Let’s break down the most common types of mortgage loans:1. Conventional Mortgage
A conventional (or uninsured) mortgage in Canada is not backed by mortgage default insurance and requires a downpayment of at least 20% of the property's purchase price.- For example, if you purchase a home for $500,000, a conventional mortgage would require you to make at least a $100,000 downpayment (20%), and the lender would finance the remaining $400,000 (80%).
- Comes in fixed-rate and adjustable- or variable-rate versions.
- Credit score: A higher credit score can help you secure better rates.
- Term length: The length of the term will impact your interest rate. Shorter terms may help you save if interest rates are anticipated to fall in the short term. Longer terms can help protect against higher rates if rates are predicted to rise in the short term.
- Fixed vs. variable rates: Fixed mortgages lock in your interest rate, while variable mortgages fluctuate with the market.
- Current prime rate: The lender’s prime rate influences variable mortgages.
- Amortization: Rates are higher for mortgages exceeding 25-year amortizations.
Qualifying for a conventional mortgage in Canada is similar to qualifying for other mortgage types. You will need to meet lender-specific criteria, including:
- Debt-to-Income Ratio: Lenders will assess your total debt compared to your income to ensure you can afford the mortgage.
- Minimum 20% Downpayment: You must have at least 20% of the property’s purchase price as a down payment.
- Good Credit Score: Lenders typically require a credit score of 680 or higher.
- Stable Income: You must prove steady income, demonstrating your ability to make mortgage payments.
2. High-Ratio (Insured) Mortgage
A high-ratio or insured mortgage is when the downpayment is less than 20%. These mortgages require mortgage default insurance to protect the lender in case of default. The insurance premiums are either paid upfront as part of your closing costs or added to your mortgage, increasing the total amount you owe. For example, if you purchase a $500,000 home with a $25,000 downpayment (5%), you would require a high-ratio mortgage and be required to pay mortgage default insurance.3. Conventional Mortgage vs. Collateral Mortgage
A collateral mortgage is another option for homebuyers, but it differs significantly from a conventional mortgage. With a collateral mortgage, your lender registers a legal charge against the property for an amount that could exceed your mortgage amount. A collateral charge mortgage registration allows you to secure your mortgage and other debts under one charge, if not now, then once you pay down your mortgage. A collateral charge mortgage is a re-advanceable mortgage. With this type of mortgage, you can increase your loan amount anytime within your limits without refinancing your mortgage.Key DifferencesLoan Flexibility: With a collateral mortgage, the lender can increase your loan as your home’s value rises without refinancing if the registered charge was originally greater than the original mortgage amount needed. Transferability: Unlike conventional mortgages, collateral mortgages cannot be transferred to another lender without additional legal fees.Equity Access: Collateral mortgages allow you to hold a HELOC, providing easy access to home equity as the mortgage is paid down without requiring a second charge to be registered behind your first mortgage.- 4. Fixed-Rate Mortgage
- Your interest rate and monthly principal and interest payments stay the same for the entire loan term.
- Available in terms like 15, 20, or 30 years.
- Predictable and stable, ideal for long-term budgeting.
5. Adjustable-Rate Mortgage (ARM)
An ARM offers:- Lower initial interest rates (often fixed for 3, 5, 7, or 10 years).
- After the initial period, the rate adjusts periodically based on market rates.
- Rates can go up or down.
6. Variable Rate Mortgage
A variable rate mortgage will fluctuate with the Prime rate throughout the mortgage term. While your regular payment will remain constant, your interest rate may change based on market conditions which impacts the amount of principal you pay off each month. When rates on variable interest rate mortgages decrease, more of your regular payment is applied to your principal. Additionally if rates increase, more of your payment will go toward the interest. A variable rate mortgage typically offers more flexible terms than a fixed rate mortgage. With variable-rate mortgages you have the option to convert to a fixed rate closed mortgage at any time, gnwithout a prepayment charge, should your needs change.7. Interest-Only Mortgage
With this type of loan:- You pay only the interest for a set number of years, typically 5 to 10.
- After the interest-only period, your payments increase to cover both principal and interest.
Final Thoughts
There’s no one-size-fits-all mortgage. The best loan for you depends on your financial situation, credit score, down payment, long-term goals, and whether you qualify for special programs.Before committing, be sure to:- Compare multiple loan options.
- Get pre-approved.
- Consult with a trusted lender or mortgage advisor.