There are two main types of mortgages available to Canadians: fixed or 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 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. 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.
Your mortgage is only good for making payment installments on your house, but there are a few other expenses you should take into and consider for your overall financial planning.
If you’re renovating for accessibility reasons, you might be eligible for the Home Accessibility Tax Credit (HATC) on qualifying expenses or goods made while renovating.
Your credit score is important because it’s the deciding factor whether or not you get preapproved and how much you get preapproved for. 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 range, but the higher your score, the lower the interest rate.
It might sound made up, but it isn’t. The mortgage stress test is for anyone applying for or renewing a home loan and was introduced in 2018 by the federal government.
The name is a bit misleading because it doesn’t involve a test. It’s actually a strict set of rules that banks and lenders must follow that gives the worst-case-scenario, such as a job loss or income reduction, to make sure the borrower can still make their mortgage payment.
Prime is the interest rate used by banks that they give to lenders for loans and lines of credit, including mortgages. Each bank sets their own prime rate, but the nation’s largest banks usually have the same rate.
Directly influenced by the Bank of Canada’s (BoC) overnight lending rate, prime can fluctuate on a monthly basis. Changes to both the BoC’s overnight lending rate and the prime lending rate are determined by current economic conditions.
The BoC meets eight times a year, and almost all big banks change their prime rate after those meetings. There are instances where bank’s prime rate changed multiple times throughout one year, but there were also instances where the rate didn’t change for years.
The answer to this depends solely on your own financial preferences. Do you want interest rates that stay the same throughout your term or can they potentially fluctuate – either increasing or decreasing? Are you a strict budget planner or can you go with the flow of changing your budget?
One other aspect to consider is economic forecasting and current market conditions. While it may be impossible to predict the future, it’s something you can do research on and try to imagine what your financial situation could be in the coming months or years.
In the long run, homeowners can end up paying extra for a fixed rate – but this isn’t always the case. The difference between fixed and variable rates can sometimes narrow, and when it does consumers find it increasingly difficult to gamble on a variable rate. Some homeowners choose a fixed rate when the prime is low to lock in that rate.