Vancouver Mortgages for Newbies (Part 2) – Types of Available Vancouver Home Mortgages

Vancouver Mortgages for Newbies (Part 2) – Types of Available Vancouver Home Mortgages

Vancouver home mortgages are offered in many different packages and formats. Lenders are all in competition for your business. Choosing the right mortgage for you can be a challenge and even stressful because it is such a big investment.

A simple oversight can end up costing you several thousand more dollars over the life of a mortgage so navigating your way through all these different types of mortgages can be a bit overwhelming.

It helps if you understand mortgage basics more clearly so in this article, we’re going to give an introduction to the different types of mortgages which are available.

Conventional Mortgage versus High-Ratio Mortgage

If you are borrowing from a mortgage lender to buy a home you will have accumulated a certain percentage of money to be used as a down payment on the home.

The percentage of money you have for your new home as it will make a difference as to whether you can qualify for a conventional mortgage or will have to opt for a high risk mortgage.

To qualify for a conventional mortgage, you must have as a down payment the equivalent of at least 20% of the purchase price of the home (may possibly be higher for some lenders).

If your down payment is between a minimal of 5% and 20% (or higher), then you will have to apply for a high-ratio mortgage. High ratio mortgages have to be insured through a mortgage insurance company such as the CMHC (Canada Mortgage and Housing Corporation) or GE Capital.

These companies provide the insurance protection to lenders who are lending you the money against your defaulting on the mortgage loan. The premium which is charged by the mortgage insurance companies is paid by you, the borrower, which is in addition to the mortgage payment itself.

Generally speaking, a person will have to pay a slightly higher interest rate for a high-ratio mortgage than for a conventional mortgage.

Home Mortgage Types

Whether you qualify for a conventional mortgage or a high-ratio mortgage these are the types of mortgages which you can opt for to finance the purchase of your home.

 

Open Mortgage

An open mortgage permits you to pay off apportion of your mortgage or your entire remaining mortgage balance anytime you choose to do so without having to pay a penalty. An open mortgage tends to have a shorter mortgage term such as 6 months or 1 year and the interest rates tend to be slightly higher for these types of mortgage as opposed to a closed mortgage.

Closed Mortgage (Also Known as a Fixed Rate Mortgage)

This is the most popular type of mortgage used by borrowers. Although at one time this type of mortgage did not allow you to prepay a portion or your entire mortgage, there is actually a little bit more latitude in many of the plans offered by lenders these days. (Varies from lender to lender). However, there are still pre-payment penalties involved, so make sure you fully understand what these penalties entail. Some lenders have no prepayment options.

A fixed rate mortgage offers more security to the mortgagor or borrower because it allows you to lock in your interest rate for any term you choose such as 3 months or a much longer term such as 5 or 10 years, and even up to 25 years.

Interest rates tend to be a lower than what is found in an open mortgage.

Variable Rate Mortgage (Also known as an Adjustable Rate Mortgage or ARM)

With this type of mortgage, you can still choose the term you want, but the interest rate you pay on the principal may vary as the prime rate changes. This type of mortgage can also be a closed or an open mortgage. Your monthly mortgage amount does not change, but what will change will be the amount of principal that is applied versus the amount of interest.

Simply put, if the prime interest rate rises, more of your monthly mortgage payment will be applied to pay for the interest increase and less will be applied to reducing the principal owed on the mortgage. The opposite is true as well.

Capped Rate Mortgage

A capped rate is a variable mortgage where the amount of the interest a lender might charge is capped at a set amount and the interest you are charged will not be higher than the capped interest rate set by the lender. These types of mortgages generally come with pre-payment penalties. They are not usually ‘portable’ which means you will have to apply for a new mortgage if you sell your home and plan to buy another property.

Convertible Mortgage

A convertible mortgage is a fixed rate mortgage and is not available with every lender. This type of mortgage allows you to lock into a longer term than your current term without having to pay a penalty.

Reverse Mortgage

These are also popularly known as CHIP (Canadian Home Income Plan) which is the main company which offers reverse mortgages. A reverse mortgage allows you to convert your existing equity into cash and you must be at least 62 years of age. Generally, you can obtain between 10 – 40% of the appraised value of the home and providing you have a certain specified percentage of equity in your home.

These are the basic Vancouver home mortgages which you can apply for when buying a home. There is a lot of fine print in any mortgage which you need to fully understand before you choose a lender. This is one major reason why are best advised to talk to a Vancouver mortgage broker before you commit to such a major investment.