Mortgage Types

In recent years negotiating a mortgage has gotten more and more complicated. Twenty years ago when we bought a home we either had 25% of the purchase price (or appraised value) as our down payment. And that was it. If we didn’t, we either borrowed from a wealthy relative (we all have one of those), or we arranged a second mortgage. We paid it every month and went along our way doing whatever it was we did for a living until we got that maturity or renewal notice and we either renewed it or those a bit more fortunate, paid it off entirely. Wow, wasn’t that simple?

Today, we seem to spend a lot of our life arranging and rearranging our mortgages to take advantage of “better” products, rates, terms and lenders. We now grapple with terms like hi-ratio, equity deals, convertible mortgages, variable rates, accelerated payments, split mortgages, cashback, non-income verification, and many more.

Let’s take a look at the VARIABLE RATE MORTGAGE. This is perhaps the most popular mortgage product on the market today, and probably the most misunderstood. Every major bank, as well as most trust and mortgage companies offer a variation of this product. What is it? A VARIABLE RATE MORTGAGE is one where the interest rate offered by the bank is directly correlated to the Bank Of Canada’s prime lending rate*. THIS RATE IS NOT FIXED FOR THE ENTIRE TERM OF THE MORTGAGE AND COULD FLUCTUATE.

There are a few variations to the VARIABLE RATE MORTGAGE. These include:

• Open Variable Rate Mortgage, usually at the bank’s prime lending rate. Most lenders will allow this mortgage to be paid off in full with no penalty or a very small one.

• Closed Variable Rate Mortgage, usually at the bank’s prime rate less a discount up to 0.75% in some cases. Can be paid off in full with three months interest penalty.

• Capped Variable Rate Mortgage, rates wouldn’t go higher than the bank’s 3-year or 5 year posted fix rate at the time of signing mortgage documents. There is usually a three month interest penalty to pay off this mortgage

For many homeowners, having a VARIABLE RATE MORTGAGE has some advantages. The primary one being the borrower’s ability to pay substantially more in principal and less in interest in a financial environment where the Bank of Canada has a relatively low interest rate.