Which type of mortgage is right for you?

Which type of mortgage is right for you?

Should You Choose a Conventional or High-LTV Mortgage? Fixed-rate or variable rate? An open loan or a closed loan? Here are some questions you’ll need to answer as you evaluate your options and choose the mortgage that meets your needs. Whether you’re about to buy a new home or renew your mortgage, these simple explanations will help you make a more informed decision.

Conventional or high loan-to-value mortgage

When you buy a property, you must provide at least 5% of its value for the down payment. It is up to you to determine if you wish to provide a higher down payment. The type of mortgage you can take out depends on the amount of your down payment.

  • A high- to- value mortgage is a mortgage where a down payment of less than 20% of the value of the property has been provided. If you choose a high loan-to-value mortgage, you will need to purchase mortgage insurance from Canada Mortgage and Housing Corporation (CMHC); Canada Guaranty, or Sagen TM to protect the lender against loss if you fail to make your mortgage payments.
  • A conventional mortgage is a mortgage where a down payment of 20% or more of the value of the property has been provided. If you choose a conventional mortgage, you won’t have to purchase mortgage insurance.

Your choice of a conventional or high-to-value mortgage will therefore depend on how much savings you have for the down payment.

Fixed or variable rate mortgage loan

A mortgage can have a fixed or variable interest rate:

  • A fixed interest rate won’t change for the life of your mortgage and your payment amounts will stay the same. You’ll always know how much your next payment will be and how long it will take to pay off your mortgage.
  • A variable interest rate will change with changes in your lender’s prime rate. Although the number of your mortgage payments may not change, the way they are distributed will change. If rates go down, more of your payments will be allocated to principal, which will speed up mortgage repayment. If rates go up, more of your payments will go towards interest charges, which means it could take longer to pay off your mortgage.

Variable rates are often lower than fixed rates because you assume some of the risks if rates change. If your budget is tight or you fear rising interest rates shortly, you can choose a fixed-rate mortgage. If you have some wiggle room in your budget, it might be beneficial to opt for a variable-rate mortgage.

Can’t make a decision? No problem. Manulife Bank’s two mortgage products allow you to divide your debt into fixed-rate and variable rate portions.

Fixed or variable rate mortgage loan fixed rate floating rate

Benefits

  • You will know exactly how long it will take to pay off your mortgage.
  • If interest rates go up, your rate will stay the same.

Benefits

  • If interest rates drop, you’ll pay off your mortgage sooner because more of your payments will go toward the principal.
  • You can pay off the entire mortgage at any time, without penalty.

Disadvantages

  • Early repayments are limited.
  • If interest rates go down, you won’t get a lower rate.

Disadvantages

  • If rates go up, more of your payments will go towards interest charges, which means it could take longer to pay off your mortgage. However, you may have the option to have your variable rate loan converted to a fixed-rate loan and lock in your rate.

Open or closed mortgage loan

The term of a mortgage loan is the length of time you commit to an interest rate, a lender, and the terms established by that lender. Mortgage terms generally vary between six months and ten years. Five years is the most common. 

  • An open mortgage loan can be paid off in full at any time, without penalty. Because of this flexibility, open mortgages usually come with higher interest rates.
  • A closed mortgage cannot be prepaid in full without penalty. However, the terms of most closed mortgages contain prepayment options that allow you to pay off your loan faster. Since closed mortgages don’t offer as much flexibility as open mortgages, interest rates are generally lower.

Choosing an open or closed mortgage depends on several factors, including the flexibility you need. If you expect your financial or housing situation to change shortly, an open mortgage might be preferable. If you don’t think your situation will change for a few years, a closed mortgage may be a good option. If you want the most flexibility, including the ability to pay off your mortgage quickly or re-borrow the money you’ve paid, consider a home equity line of credit.

Manulife Bank mortgages allow you to combine these two options.

Open or closed mortgage loanOpen MortgageClosed Mortgage

Benefits

  • You have the option of repaying all or part of your mortgage loan at any time, without any penalty.
  • Your interest costs may be lower over the term of your mortgage.

Benefits

  • Interest rates are generally lower.

Disadvantages

  • Interest rates are generally higher.

Disadvantages

  • Early repayments are limited.
  • A penalty applies if you want to repay the mortgage balance.

The best of both worlds with an all-in-one account

An all-in-one bank and mortgage account consolidates all of your savings and debts into one efficient and flexible account.

By consolidating your debt at a competitive interest rate and using your savings and income to accelerate debt repayment, you could reduce your interest costs by thousands of dollars and get mortgage-free sooner.

All-in-one bank and mortgage account benefits

  • You can save interest costs by consolidating your debts.
  • You can reduce your debts by depositing your short-term savings and income into your account.
  • You have access to your money at all times, up to your credit limit.
  • You can personalize your debts by dividing them into several portions to which different rates and different durations will apply.
  • You can easily manage your money by consolidating your savings and borrowings into one account.

Disadvantages

  • You have to manage your expenses well to maximize the benefits.

Increased flexibility with a collateral mortgage

All mortgages are secured by real property (such as a house), and this security is registered at the land registry office in the relevant province or territory. In some provinces, this operation is called “registration of a mortgage” (in Quebec), “right” or “charge” encumbering an immovable. Two types of loads can be recorded:

  • With a conventional mortgage, also called a “standard charge”, the exact amount of your mortgage on the title deed of your property is recorded. It includes the terms of your mortgage, such as loan amount and interest rate, as well as information about your property. If you increase the amount of your mortgage, the security will have to be re-registered and you may have to pay a fee.
  • With an accessory mortgage, the amount of your mortgage or a higher amount is recorded. If you save a higher amount, you may be able to increase your mortgage amount with current security at no additional cost. Increasing the amount of a mortgage always requires approval from your lender.
By aamritri

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