Ready to Explore Available Mortgage Options? Consider These 6 Types
Home buying requires money upfront in most cases, regardless of where one resides, and in Canada, home loans and mortgages are best approached when a bit of funding is available for several reasons. However, there are various types of home loans out there, each with different down payment estimates and interest rates. Read on to explore the most common mortgage options in the Canadian provinces today.
Also known as low-ratio mortgages, these loans are the most common for buyers and require a 20% or higher down payment on the entire purchase amount. These loans are standard in increments between 10 and 30 years. Those who can afford this route will generally enjoy having a choice between multiple lenders who will compete with various interest rates that appeal to these ‘secure' buyers.
Another benefit to a conventional mortgage is that the interest rate will not change unless owners refinance the loan at a lower rate once more equity is gained in the property.
A high-ratio mortgage is when the borrower purchases a home with a down payment of less than 20%. As the loan to value ratio is so high, these borrowers must carry mortgage default insurance. However, with a high-ratio mortgage, down payment requirements can be as low as 5%. Interest amounts will vary depending on the borrower's initial investment, income, debts, and ability to repay a high-ratio mortgage loan on time.
Open Mortgages & Closed Mortgages
Those looking for an option to pay off a mortgage early to save on interest without paying the penalty might opt for an open mortgage. These loans typically have shorter terms, but some may offer options for a longer-term or variable rate. However, an open mortgage may have a higher interest rate initially.
Closed mortgages are loans that cannot be paid off early, refinanced, or renegotiated before the term ends. While closed mortgages might be a good option for certain buyers, they lack flexibility should a major life change occur.
Home Equity Lines of Credit (HELOC)
A home equity line of credit essentially acts as a revolving line of credit secured by a home. Owners can borrow as much as 85% of the current equity in their home with a HELOC. Private mortgage insurance can be bypassed with a 20% down payment. Buyers may qualify for low, interest-only payments by making a standard down payment. HELOCs may also be split up into different portions. Often, one has a variable interest rate while the other portion has a fixed interest rate.
Adjustable Rate Mortgages or ARMs
Adjustable-rate mortgages are loans in which the interest rate can—and likely will—change throughout the term. Buyers typically pay a fixed rate for a certain number of years, and after that duration has passed, the loan rate can be lowered or raised depending on market conditions. In essence, an ARM can favour buyers or cost them more overall if interest rates vastly increase.
Planning on Buying a Home and Need Loan Advice?
A local broker or real estate agency such as the Peggy Hill Team can guide home shoppers towards realistic mortgage options to fit their needs and budget. In addition to helping buyers choose the best loan type, they can provide more details concerning down payment requirements for each mortgage option.