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There are two main types of mortgages available to Canadians: fixed and variable.
A fixed mortgage has historically been the more popular option among Canadians and means your interest rate won’t fluctuate over the course of your mortgage term (unlike a variable, or "floating" rate). Fixed mortgages are great if you want the stability and piece of mind of knowing what your monthly mortgage payment will be.
On the other hand, variable rates may increase or decrease during your mortgage term, making monthly payments less predictable (unless you have a fixed-payment variable rate mortgage).
Both fixed and variable rates are further broken down into two types: open and closed.
Closed fixed mortgage: A closed mortgage involves a regular repayment schedule that typically only allows limited prepayment options. Most lenders will allow you to make extra payments of up to 10%, 15% or 20% of the loan value in any given year. Many also allow increases to your monthly mortgage payments by similar amounts, however some lenders are more restrictive.
Open fixed mortgage: Just like a closed mortgage, there is a regular payment schedule set out for the borrower, except it involves more flexible options to pay down the mortgage. Those with an open mortgage can increase their regular payments or make lump sum prepayments of any amount and at any time without penalty. Open fixed mortgage rates are typically about one percentage point higher than closed mortgages due to this flexibility.
The amortization period is the length of time it will take to repay your mortgage. Most amortization periods are 25 years, and this is the maximum permitted for mortgages that are CMHC default-insured. Non-insured mortgages can have up to a 30-year amortization, and in certain cases up to 35 or 40 years.
The mortgage term is the duration of your current contract, which sets out your rate and mortgage type. A mortgage term usually lasts between one and five years, but can run up to 10 years or even longer in rare cases. At the end of each term, the borrower must renew the contract until the mortgage is fully paid down.
Here are some other factors you should know about when considering what type of mortgage you want.
Aside from obvious upfront costs such as your down payment and ongoing monthly mortgage payments, there are a few other closing costs you should be prepared for when buying a home.
Your credit score can be the most important factor in determining whether you can get a pre-approval, and for how much. Lenders want to know that you will repay your debt, so they consider the following factors: payment history, outstanding debt, credit history age, applying for new credit too often and the type of debt you are looking for (long-term debt vs. short-term debt).
Credit scores range from 300 to 900, with 750 being in the “excellent” category. Most lenders require a score between at least the 600-700, but the higher your score, the lower the interest rate you'll be able to negotiate.
Anyone obtaining a mortgage must prove they can handle payments at a higher rate than their actual mortgage rate, in the event rates rise in the future.
There are currently two variations of the stress test in effect, depending on whether your mortgage is default insured or uninsured. Both are based on the benchmark qualifying rate:
Prime, or the prime lending rate, is the interest rate Canada's major banks use when pricing variable mortgages and lines of credit. Each bank sets its own prime rate, but the country's Big 6 banks usually have the same rate, with the exception of TD Bank.
Prime rate is directly influenced by the Bank of Canada’s (BoC) overnight lending rate. If the BoC raises or lowers its target overnight rate, a change in prime rate nearly always occurs in the following days.
The answer to this depends solely on your own financial preferences. Do you want interest rates that stays the same throughout your term, or one that fluctuates whenever the Bank of Canada changes its key lending rate? Will you sleep more soundly knowing your mortgage rate won't change over the course of your mortgage term, or are you willing to take some risk in exchange for potential interest savings?
When making this decision, it's important to consider current interest rate forecasts and market conditions. While it's impossible to predict the future with any certainty, economic conditions and even the Bank of Canada can provide clues as to where interest rates may be headed.
In the long run, homeowners can end up paying extra for a fixed rate – but this isn’t always the case. The spread between fixed and variable rates can narrow significantly. Or, as is the case as of late 2020, numerous fixed-rate mortgages can be found at a discount to variable rates.
