Unless you buy your home entirely with cash, finding the perfect home to move into is only half the battle. The other half of the battle is finding the best type of mortgage for you. As you will be spending a significant portion of your life paying off your mortgage, it’s important to find one that meets your needs and budget. So how many kinds of mortgages exist?
An open mortgage offers maximum flexibility to the homeowner. With this mortgage, you can make large payments or pay off the entire mortgage without penalty. However, with this flexibility comes some fluctuation in the interest rate.
A closed mortgage is a much more fixed commitment with your lender. You will have a pre-determined interest rate over a pre-determined period of time. If you want to pay a lump sum or the remaining balance of the mortgage outside of the pre-determined payment periods, you will likely have to pay a penalty to break the closed mortgage.
While most closed mortgages have pre-determined interest rates, some closed mortgages do offer variable or adjustable rates depending upon your preference. Generally speaking, closed mortgages will have lower interest rates than open mortgages. In fact, most lenders will allow borrowers to make a lump sum payment of up to 20% of the original mortgage amount once a year without penalty (but you should verify with your lender first the exact percentage).
A convertible mortgage, much like a car, gives you the option to switch between the type of mortgage you hold during a term. You can start with an open mortgage and then lock into a closed mortgage based on the market and your needs.
A hybrid mortgage is a term used when there is more than one type of mortgage contained in a single mortgage registration. This means that one mortgage could contain a variable rate portion, a line of credit portion, a fixed rate portion - or any combination of these. If you are a financially savvy borrower this could be the right financial plan for you.
If you need a substantial amount of liquid capital, a reverse mortgage allows you convert your home equity into a lump sum payment or monthly cash payment for living expenses. This can be settled in a myriad of ways: the amount can have a pre-determined payback date, or the amount can be paid back when the homeowner wishes to sell the property. The balance of the loan is settled from the proceeds of the sale of the property either by the property owner or their heirs.
There is no perfect type of mortgage for everyone. What may work for you may not work for others. To learn more about mortgages in general check out these blogs on renewing your mortgage, how an increase in the stress test qualifying rate by the OFSI will affect you and your mortgage application in 2022, and how the government hopes to change the purchasing process.
I recommend sitting down with your financial advisor to find out which is best for your needs, someone in particular I trust is Lisa Belanger - a regional partner and mortgage broker in the Ottawa region. In the meantime, I hope this list helped open your eyes to the possibilities of what mortgage may be right for you!