As a mortgage broker, it’s essential for you to understand the different types of mortgage loans available in Canada. Here’s a simple guide to help you navigate the options:
Adjustable-Rate Mortgages (ARMs)
An Adjustable-Rate Mortgage (ARM) has an interest rate that can change periodically based on the Bank of Canada’s overnight rate. If this rate goes up, so will your monthly payments. ARMs generally offer lower initial rates compared to fixed-rate mortgages, but they come with the risk of rising payments if interest rates increase. ARMs can be structured with different adjustment periods, such as one year or five years, during which the rate can change. Pros:
Potential for lower costs if rates drop
Lower penalty for breaking mortgage early
Cons:
Payments can increase if interest rates rise
Less predictable than fixed-rate mortgages
Fixed-Rate Mortgages
A Fixed-Rate Mortgage has a set interest rate and monthly payment that doesn’t change throughout the term of the loan. This stability makes it a popular choice for those who prefer predictability in their finances. Pros:
Stable monthly payments
Predictable payoff timeline
Cons:
Generally higher interest rates compared to ARMs
Higher penalties for breaking the mortgage early
High-Ratio Mortgages
A High-Ratio Mortgage is when your down payment is less than 20% of the home’s purchase price. These mortgages require mortgage default insurance from providers like CMHC, Sagen, or Canada Guaranty, which adds to the overall cost. Pros:
Lower down payment requirements
Accessibility for first-time buyers
Cons:
Additional cost for mortgage insurance
Higher overall cost due to insurance premiums
Conventional Mortgages
Conventional Mortgages require a down payment of 20% or more of the home’s purchase price. These loans do not need mortgage default insurance, but they usually come with higher interest rates. Pros:
No need for mortgage insurance
Potentially lower overall cost without insurance premiums
Cons:
Higher down payment required
Higher interest rates
Home Equity Line of Credit (HELOC)
A HELOC allows you to borrow against the equity of your home. It offers flexibility in how you use the funds, whether for debt consolidation, home improvements, or other expenses. HELOCs can be standalone or combined with a mortgage (re-advanceable mortgage).
Pros:
Flexible borrowing
Can access funds as needed
Cons:
Your home is used as collateral
Potential for higher interest costs if not managed carefully
Reverse Mortgages
A Reverse Mortgage is designed for homeowners aged 55 and older, allowing them to convert home equity into cash without selling their home. You can borrow up to 55% of your home’s value, with no regular mortgage payments required. 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. Pros:
Access to cash without selling your home
No monthly mortgage payments
Cons:
Higher interest rates
Significant prepayment penalties
Potential impact on estate value
Private Mortgages
Private Mortgages are offered by individuals or specialized institutions for buyers who can’t get approved by traditional lenders. These loans typically have higher interest rates and shorter terms (6 months to 2 years). Pros:
Accessible for those with poor credit or other financial challenges
Cons:
Higher interest rates
Shorter loan terms
Less regulation, requiring careful lender evaluation
This guide should help potential borrowers understand the key features, benefits, and risks of each mortgage type, making it easier for them to make informed decisions.