Mortgage Basics

Mortgage Options In Canada

Mortgage Options In Canada
Written by
  • Ashley Howard
| 22 September 2023
Reviewed, 22 September 2023

Table of contents

    In Canada, a wide variety of mortgage options are available to suit homeowners’ diverse needs. Understanding the different types of mortgages can help you make the right decision when it comes to financing your home. 

    Whether you’re a first-time homebuyer or looking to refinance, this comprehensive guide will walk you through the various mortgage options in Canada, their features, and who they are best suited for.

    High-Ratio Mortgage: Putting Down Less Than 20%

    High-ratio mortgages are for homebuyers with a down payment of 5% – 19.99% of the purchase price. High-ratio mortgages cannot exceed a purchase price of $1 million. These mortgages are sometimes called “insured mortgages” or “default-insured mortgages.” The high-ratio refers to the loan-to-value (LTV) ratio, where the mortgage makes up a greater than 80% proportion of the property’s value.

    With high-ratio mortgages, you will require mortgage default insurance. This insurance reduces some of the risks to the lender if you default on your mortgage payments. Crown corporation Canada Mortgage and Housing Corporation (CMHC) and private insurers Canada Guaranty (CG) and Sagen (GW) are the providers of mortgage loan insurance in Canada. 

    A high-ratio mortgage has some benefits compared to a conventional mortgage, which requires a larger down payment amount to enter the housing market. A smaller down payment can benefit many first-time buyers as this lump sum due upfront is typically one of the largest hurdles to homeownership. Additionally, interest rates on high-ratio mortgages are much lower than conventional mortgages since mortgage default insurance reduces the risk to lenders. 

    Conventional Mortgages: Putting Down 20% or More

    Conventional mortgages are for homebuyers who can afford a down payment of 20% or more of the home’s value. With conventional mortgages, your purchase amount can exceed $1 million since the minimum required down payment for purchases of this amount or more is 20%. 

    With a conventional mortgage, borrowers are not required to purchase mortgage default insurance, as the down payment provides sufficient equity to protect the lender. Conventional mortgages are often referred to as “uninsured mortgages.”

    While a 20% down payment may seem like a significant hurdle for many buyers, it has advantages. By putting down 20% or more, borrowers can avoid the additional cost of mortgage insurance and have more equity in their home from the start. 

    Note: High-ratio and conventional mortgages may be the most well-known, but there is a third mortgage option called “insurable”. This option is limited to down payments of 20% or more, but unlike a conventional mortgage, it is limited to 25-year amortization and properties less than $1 million. Insurable mortgages let the borrow access rates almost as low as high-ratio mortgage rates.

    Fixed-Rate Mortgages: Stability and Predictability

    A fixed-rate mortgage is a popular choice among homeowners in Canada. With a fixed-rate mortgage, the interest rate and principal amount remain the same throughout the mortgage term. Your monthly mortgage payments will remain consistent, providing stability and predictability.

    Fixed-rate mortgages are suitable for homeowners who prefer a set budget and want to avoid fluctuations in their mortgage payments. By locking in a specific interest rate, borrowers can plan their finances accordingly and have peace of mind knowing that their mortgage payments won’t change, even if interest rates rise.

    It’s important to note that fixed-rate mortgages typically have higher interest rates than variable-rate mortgages. Additionally, breaking a fixed-rate mortgage before the end of the term can result in high prepayment penalties.

    Variable-Rate Mortgages: Riding the Wave of Interest Rates

    A variable-rate mortgage may be an attractive option for homeowners comfortable with uncertainty. With a variable-rate mortgage, the interest rate fluctuates based on the prime lending rate set by the Bank of Canada. 

    There are two types of variable-rate mortgages: adjustable rate (ARM) and variable rate (VRM). 

    Adjustable-rate mortgages (ARM) have a mortgage payment that adjusts with changes in the lender’s prime rate. The principal amount will remain the same, but as the lender’s prime rate changes, so will the mortgage payment’s interest portion. If interest rates increase, you will face a higher mortgage payment as the interest portion will adjust to reflect the increased interest rate. If interest rates decrease, your interest portion of the mortgage payment will also decrease, leading to a lower mortgage payment. 

    However, variable-rate mortgages (VRM) have a fixed mortgage payment. If interest rates increase, more of your mortgage payment will go toward interest and less to the principal. If interest rates decrease, more of your payment will go toward the principal and less to the interest.

    Variable-rate mortgages are typically associated with lower interest rates compared to fixed-rate mortgages. This can result in lower monthly mortgage payments, especially when interest rates are low. However, it’s important to consider the potential for interest rate increases, as this can lead to higher monthly payments.

    Homeowners who choose variable-rate mortgages should be prepared for potential fluctuations in their monthly payments and have the financial flexibility to adjust their budget if necessary. If you have a VRM, you could be at risk of hitting your trigger rate or trigger point in an increasing interest rate environment. 

    A trigger rate is reached when your mortgage payment fully goes to interest. Your trigger point is reached when your payment is insufficient to service even the interest portion. If this happens, you are at risk of negative amortization, meaning you could owe more than your original mortgage starting at the onset of your term. 

    Open, Closed, and Convertible Mortgages: Flexibility vs. Stability

    When considering a mortgage in Canada, it’s essential to understand the differences between open, closed, and convertible mortgages. Each type offers a different level of flexibility, allowing homeowners to choose the option that best aligns with their financial goals.

    Open Mortgages: Flexibility for Early Repayment

    An open mortgage allows homeowners to make extra payments or pay off the entire mortgage before the end of the term without incurring penalties. This can be advantageous for borrowers anticipating additional funds or wanting to pay off their mortgage sooner.

    However, the flexibility of an open mortgage often comes with significantly higher interest rates than closed mortgages. This trade-off allows borrowers to have the freedom to make additional payments but may result in a higher overall cost of borrowing.

    Open mortgages are suitable for homeowners who value flexibility and anticipate having the financial means to make extra payments toward their mortgage. It’s important to evaluate the potential cost savings of early repayment against the higher interest rates associated with open mortgages.

    Closed Mortgages: Stability and Lower Interest Rates

    On the other hand, closed mortgages offer more stability and lower interest rates compared to open mortgages. With a closed mortgage, homeowners are limited to how much they can make as a prepayment toward their mortgage each year. 

    Lenders typically allow borrowers to make a certain percentage (typically 10% – 20%) of their balance as a prepayment each year without penalties. Breaking or paying off a closed mortgage before the end of the term can result in significant prepayment penalties.

    Closed mortgages are a suitable option for homeowners who plan to stay in their homes for the entire term of the mortgage and may not have additional funds above the prepayment limit to put toward their mortgage each year. Considering the prepayment privileges and penalties associated with closed mortgages is essential to ensure they align with your financial goals.

    Convertible Mortgages: Flexibility with an Option to Switch

    Convertible mortgages offer homeowners the flexibility of a short-term mortgage with the option to switch to a longer-term length at any time. This type of mortgage is typically for a 6-month term, and you can renew into a longer-term mortgage at any time without penalty. 

    Convertible mortgages have the same restrictions as closed mortgages when it comes to prepayments during the term. This means you are unable to fully pay off a convertible mortgage or make a prepayment above a certain percentage without prepayment penalties. However, you can wait until the end of the 6-month term to avoid prepayment penalties. 

    This type of mortgage is advantageous for homeowners who are not sure how long they plan to stay in their home or if there is a chance that interest rates will decrease in the future. If interest rates are expected to decrease, homeowners may choose a 6-month convertible mortgage initially to wait for interest rates to fall before locking into a 5-year fixed rate term. However, if interest rates continue to rise, homeowners can either renew for another 6-month term to see if rates will decrease or convert to a fixed-rate mortgage to benefit from a locked-in rate.  

    Convertible mortgages often come with lower interest rates compared to open mortgages, making them an appealing option for borrowers who desire short-term flexibility and want to avoid higher borrowing costs. It’s important to understand the terms and conditions of a convertible mortgage, including any conversion fees or limitations.

    Note: Convertible mortgages are more commonly recommended when clients are bridging between properties and looking to port their mortgage to their new property. Mortgage porting can be a great way to avoid penalties while keeping your original, possibly lower rate. Bridging is needed when a client buys a new property before the sale completion of their old property. The lender will set a convertible mortgage on their new property to be replaced with the ported mortgage once their old property’s mortgage is paid off.

    Portable Mortgages: Seamlessly Moving Your Mortgage

    A portable mortgage allows homeowners to transfer their existing mortgage to a new property if they decide to sell their current home and purchase a new one. This includes transferring the interest rate, remaining amortization, loan terms, and mortgage balance to the new property.

    Portability can be valuable for homeowners who expect to move within their mortgage term. By porting their mortgage, homeowners can avoid penalties for breaking their mortgage contract and take advantage of their existing interest rate.

    However, there might be limitations and conditions associated with portable mortgages. Homeowners may still be subject to prepayment penalties if the new property costs less than the remaining mortgage balance. If the new mortgage is more than your current mortgage, you may need to blend your current interest rate with a higher interest rate for the new mortgage amount. It’s crucial to consult a mortgage expert to understand a mortgage’s portability features.

    Assumable Mortgages: Transferring a Mortgage to a New Owner

    An assumable mortgage allows homebuyers to assume the existing mortgage of the current homeowner. In this scenario, the buyer takes over the remaining mortgage payments and the terms and conditions outlined in the original mortgage contract.

    Assumable mortgages can be advantageous for both buyers and sellers. For buyers, assuming a mortgage can be attractive if interest rates have increased since the original mortgage was obtained. It allows them to benefit from the existing interest rate and potentially save on financing costs.

    On the other hand, sellers may find assumable mortgages appealing if they plan to move into a less expensive property but want to avoid prepayment penalties due to the remaining years on their mortgage term.

    It’s important to note that not all mortgages are assumable, and lenders must approve the buyer who wants to assume the mortgage. Additionally, the terms and conditions of the original mortgage must remain the same. If the seller has significant equity in the home, you will either need to make a sizeable down payment to assume the current mortgage or obtain a second mortgage for the remaining balance that the existing mortgage won’t cover. 

    Note: It is advisable for sellers to seek legal advice before moving forward with an assumption as it may pose liability and covenant risks to them if the buyer defaults on the assumed mortgage.

    Collateral Mortgages: Accessing Additional Funds for the Future

    A collateral mortgage is a re-advanceable mortgage that allows borrowers to re-advance funds as the mortgage is paid down. The re-advanced funds paid off within their existing limits and can be accessed by homeowners at any time without having to refinance the mortgage.

    Collateral mortgages can comprise multiple mortgage products such as home equity lines of credit (HELOCs), mortgages and term loans. Lenders will register your home as a collateral charge, similar to what they do for standard charge mortgages. Collateral charges can provide a convenient way for homeowners to access additional funds without a separate approval process. This also makes borrowing cheaper as interest rates tend to be lower on secured credit lines (such as HELOCs) and loans compared to unsecured loans and lines of credit. 

    However, it’s important to consider the potential risks associated with collateral mortgages. Borrowers could risk their homes as they must commit to paying back the additional funds, even if the collateralized property’s value decreases or the borrower’s financial situation worsens.

    Private Mortgages: Alternative Financing Options

    Private (or syndicate) mortgages, more commonly known as subprime mortgages, are home loans offered by individuals, mortgage finance companies or B-lenders. They are sometimes offered as specialized products through major financial institutions when a borrower’s situation demands alternative underwriting guidelines. Typically, borrowers who cannot secure approval from traditional lenders, such as banks, will use private mortgages as a solution for their unique circumstances or credit challenges.

    While subprime and syndicate mortgages can provide access to funding when traditional lenders are not an option, they often come with much higher interest rates, fees, and shorter loan terms. Borrowers should exercise caution when considering a private mortgage and thoroughly evaluate the terms and conditions, as the private mortgage industry may not be as heavily regulated as prime lending (traditional mortgage market) in their province.

    Other Mortgage Types: Cash-Back, Second, and Reverse Mortgages

    In addition to the mortgages mentioned above, several other options are available to homeowners in Canada. 

    1. Cash-back mortgages provide borrowers with additional money from the lender, which can be used for immediate financial needs, such as furnishing their new property, paying down debts to reduce their mortgage qualifying capacity or repairs to the new property.
    2. Second mortgages allow homeowners to borrow against the equity they have built in their property while maintaining their existing first mortgage.
    3. Reverse mortgages are designed for homeowners aged 55 or older who cannot qualify on their income, allowing them to access the equity they’ve built in their homes. Repayment of the loan is typically deferred until the homeowner moves, sells the property, defaults on the loan, or passes away.

    It’s important to understand the terms, conditions, and potential risks and benefits associated with these mortgage types before making a decision.

    How to Choose the Right Mortgage for You In Canada? 

    Choosing the right mortgage requires careful consideration of your financial situation, goals, and preferences. Here are some factors to consider when deciding:

    • Down payment: Evaluate your ability to make a down payment and determine whether you qualify for a high-ratio or conventional mortgage.
    • Interest rate: Consider your risk tolerance and decide between a fixed-rate or variable-rate mortgage.
    • Flexibility: Determine the level of flexibility you require and assess whether an open, closed, or convertible mortgage best fits your needs.
    • Portability: If you anticipate moving within the term of your mortgage, assess the portability options available to you.
    • Additional funds: Consider whether you need access to additional funds beyond the home’s purchase price and explore collateral mortgage options.
    • Special circumstances: If you have unique circumstances, such as credit challenges or specific religious requirements, explore alternative mortgage options like subprime, private or halal mortgages.
    • Professional advice: Consult a licensed mortgage expert who can provide personalized guidance based on your financial situation and goals.

    How Do I Qualify For A Mortgage In Canada? 

    To qualify for a mortgage, lenders will look at your down payment, income, credit score, and debt service ratios to determine the likelihood of your ability to pay a mortgage. You must also pass the stress test to qualify for a mortgage. 

    Your income and debt service ratios will help a lender determine if you have enough income compared to your debts to afford the mortgage you require comfortably. The guidelines for debt service ratios vary between lenders. Debt service ratios are typically 32% for uninsured mortgages and 39% for insured mortgages on your gross debt service ratio (GDS), and the total debt service ratio (TDS) could be limited to 40% for uninsured mortgages and 44% for insured mortgages.

    Your down payment will determine how much mortgage you can afford. 5% is the minimum requirement for homes valued at $500,000 or less. Properties between $500,000 and $999,999 require 5% on the first $500,000 and 10% down on the remainder. Any home valued at $1 million or more requires a 20% down payment, though you should ascertain from your lender if they have a sliding scale instead. 

    Your credit score is an indication of how well you have been able to manage debt and whether you have made timely payments. A higher credit score indicates that you are likely a low-risk borrower and are likely to make timely mortgage payments. The higher your credit score, the more attractive you are to lenders, and you may even be able to secure a lower interest rate. 

    The stress test ensures you can still afford your mortgage should interest rates rise. The stress test is the higher of your mortgage rate +2% or the benchmark minimum qualifying rate of 5.25%. The stress test artificially increases your qualifying mortgage payment to see if you can still meet OSFI’s GDS and TDS limits. If you no longer qualify under the stress-tested rate, you will need to increase the size of your down payment, increase your income, or look for a lower-priced home.

    Frequently Asked Questions

    How do I know which type of mortgage is right for me?

    When reviewing your mortgage options, you must understand your short- and long-term goals and then research the options that best align with those goals. It’s advisable to connect with a mortgage professional who can help you identify which type of mortgage best suits your needs.

    Can I get a mortgage without a down payment?

    You will always need a down payment for a mortgage. However, if you have access to credit that you can afford to cash out and make repayments on, you may be able to use these funds toward your down payment. However, this may affect your borrowing capacity and net worth, preventing you from qualifying for a mortgage. You should speak with a mortgage expert to work out these numbers before moving ahead with any solution that may impact your ability to qualify. 

    When is an open mortgage right for me?

    An open mortgage may be right for you if you expect significant funds like an inheritance higher than the prepayment limits available on closed mortgages. If you plan to use these funds toward your mortgage, an open mortgage will allow you to do this without significant prepayment penalties.

    Final Thoughts 

    Canada offers a range of mortgage options to suit the diverse needs of homeowners. From high-ratio and conventional mortgages to insurable, collateral, fixed-rate and variable-rate mortgages, there is a mortgage type for every homebuyer or homeowner. 
    Understanding each option’s features, benefits, and considerations will empower you to make the best decision for your financial future. Consult with our mortgage specialists to explore your options and find the mortgage that best fits your needs and goals.