Like homeowners themselves, mortgages come in all sorts of shapes and sizes in Canada.
You won’t know which type of mortgage is right for you until you’ve learned a little about how each one works and the type of property or borrower they’re designed for.
Knowing about different types of mortgages in Canada can help ensure that you apply for the right one, depending on your home ownership goals.
Common types of mortgages to know
1. High-ratio mortgages
A high-ratio mortgage is a home loan in which the buyer’s down payment is less than 20%, meaning they have to borrow more than 80% of their home’s value.
On a $600,000 home, for example, you’d be in a high-ratio mortgage if you put down less than $120,000.
When you take out a high-ratio mortgage, you’ll be required to purchase loan insurance as a means of protecting your lender, which is why high-ratio mortgages are also called “insured mortgages.”
2. Conventional mortgages
Conventional mortgages are the flip side of the high-ratio mortgage coin. If you make a down payment of 20% or more on a home, you’ll find yourself in a conventional mortgage.
Putting 20% down is a tall order for many buyers, but it’s a must if you’re purchasing any property priced at $1 million or more.
There’s no mortgage insurance required when you make a down payment of this size, so conventional mortgages are also referred to as “uninsured mortgages.”
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3. Fixed-rate mortgages
With a fixed-rate mortgage, the interest rate you agree to with your lender at the outset of your loan will remain the same for the entirety of your loan term.
If you sign a five-year fixed-rate mortgage at 4%, for example, your interest rate will be 4% until the end of that five-year term.
Fixed-rate mortgages are the preferred option of borrowers who don’t want — or can’t afford — to have their mortgage payments fluctuate. But that stability comes at a price — higher interest rates and prepayment penalties that can take your breath away.
4. Variable rate mortgages
The rate of interest charged on variable-rate mortgages may rise or fall depending on which way the Bank of Canada moves its overnight rate. The higher the overnight rate goes, the more your monthly mortgage payments will increase.
Variable rate mortgages are inherently more risky for borrowers, and the risk increases whenever inflation rises and the Bank of Canada has to tamp it down with higher rates. But variable rates are generally lower than fixed rates, which is why they can be attractive to some borrowers.
5. Open, closed and convertible mortgages
Before you begin or renew a mortgage, you’ll have to think about open vs. closed mortgages.
An open mortgage allows you to increase your regular payments or make extra lump-sum payments without being penalized. The flexibility can be great for borrowers looking to pay off their mortgages early, but open mortgages tend to come with interest rates that are higher than those attached to closed mortgages.
Closed mortgage terms, including how much you’re allowed to pay back each year are determined at the outset. There are generally allowances to make some prepayments or pay on a bi-weekly rather than a monthly schedule, but making any significant changes often requires you to break your mortgage contract and pay steep penalties.
There’s also the option to go for a convertible mortgage, which allows you to switch from open to closed, or closed to open, at some point during your mortgage term. Interest rates are generally lower for convertible mortgages than they are for open mortgages.
6. Collateral mortgages
A collateral mortgage is used when a borrower applies for a mortgage that’s more than the amount required to purchase a home. The extra funds are provided to the homeowner to use in the future.
Collateral mortgages can be thought of as home equity lines of credit that get approved at the same time as the original mortgage rather than a few years down the line. Because there’s no additional approval process with a collateral mortgage, they can be a convenient way to generate cash for later use.
But that convenience isn’t risk-free. You’ll have to commit to paying back the money you borrow at a potentially higher interest rate. And if your home decreases in value, or your financial situation worsens, you might not have access to these funds at all.
7. Private mortgages
Private mortgages are home loans used by buyers who can’t get approved by a bank or other mainstream lender.
Private mortgages are offered by both individuals and specialized institutions. They can be handy when funding is hard to come by, but the interest rates are higher and the loan terms shorter.
The private mortgage industry isn’t regulated as heavily as the traditional mortgage market, either, so borrowers need to be extremely cautious when evaluating a private lender.
8. Cash-back mortgages
If you’re approved for a cash-back mortgage, you’ll receive more from your lender than the amount required to purchase your home. The extra money is delivered as a lump sum and is often used by home buyers to cover immediate financial needs, like closing costs or repairs that can’t be put off.
Cash-back mortgages can be useful, but they come with higher interest rates than some other loan types and are only available if you take out a fixed-rate mortgage.
9. Tenants-in-common mortgages
If two or more buyers decide to purchase a property together, they may opt for a tenants-in-common mortgage.
In a tenants-in-common mortgage, multiple people or corporations take out a home loan together. The mortgage outlines how much of the property each party owns and what portion of the mortgage each one is responsible for paying.
10. Joint tenancy mortgages
Like a tenants-in-common mortgage, a joint tenancy mortgage is used when multiple buyers are purchasing a property together.
Joint tenancy mortgages differ from tenants-in-common mortgages in two ways. First, joint tenancy buyers have equal ownership of the home and are responsible for paying an equal share of the mortgage. Second, if one of the co-owners involved in a joint tenancy mortgage dies, their share of the home goes to the remaining co-owners. It can’t be left to an heir or third party.
11. Blended mortgages
A blended or “blend-and-extend” mortgage involves working with your lender to find a new interest rate, extending your loan term and applying the new rate to the next phase of your mortgage. The new interest rate will be somewhere between the rate you originally agreed to and where rates are today, so a “blend” of the two.
Blended mortgages aren’t something lenders actively promote, but if you’ve proven to be a responsible borrower and wish to keep your mortgage with your current lender, it could be an option.
Blended mortgages really only make sense when interest rates have fallen, though. You don’t stand to gain much by blending your current mortgage rate with a higher one.
12. Second mortgages
When a homeowner takes out a loan on a property that already has a mortgage, it’s known as a second mortgage.
A second mortgage can be a way of turning home equity into cash, but agreeing to one means making payments on two home loans at the same time, which isn’t for everybody.
With a second mortgage, borrowers can access up to 80% of their home’s appraised value — minus what they still owe on their first mortgage. If a home is worth $750,000, for example, but the owner still owes $500,000 on the first mortgage, the largest second mortgage they could apply for would be $100,000.
13. Reverse mortgages
A reverse mortgage is a loan product for homeowners who are 55 or older. With a reverse mortgage, owners receive a cash loan based on the equity they’ve built in a property. The maximum reverse mortgage allowed is 55% of a home’s appraised value.
Reverse mortgages are a way for aging homeowners short to generate cash without having to sell their home and miss out on any future appreciation. But the interest rate on a reverse mortgage is typically higher than what regular mortgages cost, and the prepayment penalties can be considerable. Borrowers can choose to pay off the interest regularly, but neither the interest nor the principal has to be paid back until they move, sell the property, default on the loan or the last borrower dies.
14. Condo mortgages
When you take out a mortgage to buy a condo, you’re not actually dealing with a financial product solely for attached properties. But your lender will take an additional factor into consideration when determining how much to loan you: condo maintenance fees.
Any mortgage lender will look at your debt service ratios, credit rating and potential housing costs, including your mortgage payments, utilities and property taxes.
With a condo mortgage, your lender will also factor in 50% of your monthly maintenance costs, which can make qualifying for a condo mortgage difficult for some borrowers.
15. Halal mortgages
Because Sharia law prohibits riba, or loans that charge interest, conventional mortgages are forbidden for practicing Muslims. To meet the spiritual and financial needs of Muslim homebuyers, a number of Canadian lenders are now offering halal mortgages. The three shariah-compliant mortgages are Murabaha, Ijara, and Musharaka. Each has a different structure and method for transfer of ownership.
Frequently asked questions about mortgage types
When choosing a mortgage, you need to do your work and put in the research. It can be helpful to evaluate the services and mortgage offerings of both direct mortgage lenders and mortgage brokers. Explain your situation and goals, and ask lots of questions to identify the type of mortgage that’s best for your needs.
Refinancing a mortgage is a financial strategy where you break your existing mortgage contract and pay the current balance in full by securing another mortgage loan, typically with different terms or a lower rate.
A 30-year mortgage offers lower monthly payments and more flexibility than shorter mortgages. But it might also cost more over the lifetime of the loan.