7 Types of Mortgages for First Time Home Buyers

Mortgage debt remains one of Canada’s biggest debt problems – the average mortgage debt is inching towards $300,000. Thanks to years of historically low interest rates, easy access to credit, and cheap money, many families, from Vancouver to Toronto Montreal, have dipped their toes in the housing market. Unfortunately for a great percentage of these households, they’re house-rich and cash-poor with monster mortgages.

Simply put, they’re overleveraged, and one missed paycheque, one job loss, or a two percent cost living increase could send the household into disarray.

What’s the solution, especially if you’re a first-time homebuyer or homeowner? Learn about Canada’s mortgage market immediately!

Here are seven types of mortgages first-time home buyers and homeowners need to know:

Type 1: Fixed-Rate Mortgages

One of the reasons why the Canadian real estate market has been booming for the last decade is because of interest rates, as well as housing supply. With rates at historic lows, investors, individuals, and families took advantage and plunged themselves into the real estate market. So, one of the mortgage products you will come across is a fixed-rate mortgage, in which the interest rate is established and locked in for the term of the mortgage.

Type 2: Variable-Rate Mortgages

Also known as an adjustable rate mortgage (ARM), a variable rate mortgage allows you to change the rate during the term of the mortgage. At the beginning, your mortgage will be created and treated as a traditional loan based on the current rate of interest. But, as time goes by, the mortgage will be reviewed at regularly scheduled intervals and find out if the market rate has changed.

Moreover, you also have the option of modifying the size of your mortgage payment or the amortization period (or both). The mortgage lender – conventional or otherwise – will change the repayment system.

Type 3: Open Mortgages

When your cash-rich and house-rich, then an open mortgage might be suitable for you. This is a type of mortgage that affords you flexibility to repay the mortgage at any point without penalties, fees, or other egregious charges. It should be noted that open mortgages typically come with shorter amortization periods, though some financial institutions are willing to go with longer terms – it depends on the borrower.

That said, be prepared to pay higher mortgage rates on open mortgages.

Type 4: Closed Mortgages

A closed mortgage is one of the better types of mortgages on the open market today. Why? Because you can save a lot of money in the long run.

Under a closed mortgage, you cannot prepay, renegotiate, or refinance before maturity. However, as part of a closed mortgage, you are given lower interest rates, which saves you plenty of loonies and toonies on interest rates over a 20-year period. Of course, these lack flexibility, but the savings outweigh this potential setback.

Type 5: Low Ratio Mortgages

Let’s be honest: it can be virtually impossible for the average person or family to hand over a down payment of 20 percent on any property in Toronto. Since homes and even condominiums are valued way above $500,000 – which does require a higher down payment today – you are immediately priced out based on the down payment.

If you have a handsome down payment, then you will likely have a low ratio mortgage where you do not need mortgage protection insurance.

Type 6: High Ratio Mortgages

On the other end of the spectrum is a high ratio mortgage where the borrower is putting down less than 20 percent of the purchase price of the property as the down payment. While it is difficult to be approved for a mortgage without a substantial down payment, it is possible, but you will need mortgage default insurance. This is offered by three mortgage insurance companies:

• Canada Mortgage and Housing Corporation (CMHC).
• Genworth Financial.
• Canada Guarantee.

Type 7: HELOC Mortgages

A home equity line of credit as a mortgage? Believe it or not, it is possible.

First, what is a home equity line of credit, or HELOC? This is a line of credit secured by your home that allows you to borrow up to the credit limit (percentage of your home’s value).

Now, a HELOC can be an infusion of a credit card and a mortgage; and one part can be complemented by a fixed-rate and the other portion can consist of a variable-rate. Just be aware that HELOC rates are climbing, and the big banks are tightening their rules on this substitution. In other words, it might be a thing of the past.

For first-time homebuyers, acquiring property anywhere in Canada can seem like an impossible dream. Even in remote parts of the country where you’d think homes would be cheap – Yellowknife, North Bay, or Iqaluit – you can fork over a huge sum of money.

If you feel that your back is against the wall and the real estate market is against you, it is important to equip yourself with knowledge pertaining to the mortgage market, otherwise you may get fleeced, you might pay more, or you might get rejected.