Types of Mortgages

Types of Mortgages in Canada

  In Canada we are able to choose from several types of Mortgages.  Depending on your situation, there is a product to suit your needs.  


An Open Mortgage will give you a lot of flexibility when it comes to making additional large payments or paying the mortgage off completely at any time without having to pay any penalties.  However, the interest rate will be higher than a fixed rate for the term of the mortgage.  This is the downside of an Open Mortgage, due to the flexibility they offer homeowners.


A Convertible Mortgage is similar to a Closed Mortgage but offers the flexibility of changing the term of the mortgage by extending it without having to pay a penalty to do so.  Some lenders also offer Convertible Mortgages so that borrowers can opt to change from a fixed rate mortgage to a variable rate mortgage, or vice versa. Most Open Mortgages are actually a type of Convertible Mortgages in that the borrower can move the mortgage to a closed term by renegotiating the mortgage without penalty.  Often these homeowners will choose to do this due to volatile rise in interest rates.  


A Hybrid mortgage is simply a mix of several different elements found in traditional mortgages, making it suitable for those looking for a combination of the best options. These mortgages can contain elements such as a fixed rate portion, a variable rate portion, a line of credit portion or any other credit instruments.  You will find a wide array of Hybrid Mortgages offered through various Financial Institutions and Mortgage Lenders.  They are designed to attract borrowers who are looking for an all-round lending product to support an advanced financial plan or strategy.  An all-in-one type of product to cover off many different aspects of a person’s financial needs.  


A Closed Mortgage is a common type of mortgage in Canada right now.  This type of mortgage locks in a specific rate for the term of the mortgage.  When the mortgage comes up for renewal, the rate will be determined for the next term per the current interest rates at that time.  This type of mortgage usually offers a lower interest rate than an open mortgage. 
If you were to payoff the mortgage early (before the end of the term), you would be assessed a prepayment penalty by the lender.  But lenders will normally offer you the option of making one lumpsum payment each ye
ar without penalty (from 10% to 20% of the original mortgage amount depending on the lender).  And many will also allow you to increase your monthly payments as well (by 10% to 20% depending on the lender).  When possible, homeowners can take advantage of both those options.  All lumpsum payments go directly to the principal balance of the mortgage. 
Closed Mortgages offer either a fixed rate for the term (rate remains the same for the term of the mortgage) or a variable rate (rate is subject to fluctuation of the lender’s Prime Rate during the term of the mortgage).    


A Reverse Mortgage provides home owners access to their equity without selling of their property.  The homeowner, 55 years or older, has the opportunity to convert the amount of equity in their home into a Reverse Mortgage and draws funds either as a lump sum or as monthly payments, from the Lender to the home owner (thus it is called a Reverse Mortgage). Once the home owner no longer owns the property or is deceased, the balance in full is due.  And the proceeds of the sale of property will be used to settle the balance owing.