Understanding Your Mortgage Options

Congratulations! You’ve decided to begin your search for a new home, or

perhaps you’ve already found the home of your dreams and are ready to

make an offer. It’s now time to consider your mortgage options. But with so

many different choices available, how can you select the right kind of

mortgage for your needs?

To help you make an informed decision, Canada Mortgage and Housing

Corporation (CMHC) offers the following answers to some of the most

common questions Canadians have about choosing a mortgage:

What is the difference between conventional and high-ratio

mortgages?

A conventional mortgage is a loan for up to 80 per cent of the purchase

price (or market value) of a home. With a conventional mortgage, the

buyer supplies a down payment of at least 20 per cent, and mortgage

insurance is usually not required. If your down payment is less than 20

per cent of the purchase price, however, you will typically need a highratio

mortgage. High-ratio mortgages normally have to be insured

against payment default.

What are fixed, variable or adjustable interest rates?

When you choose a mortgage, you have to decide whether you want the

interest rate to be fixed, variable or adjustable. A fixed rate is locked-in

for the entire term of the mortgage. With a variable rate, the payments

remain the same each month, but the interest rate fluctuates in

accordance with the overall market. For adjustable rate mortgages, both

the interest rate and the mortgage payments vary based on market

conditions. Talk to your broker to find out which option is right for you.

Should I choose an open or closed mortgage?

With a closed mortgage, you pay the same amount each month for the

entire term of the mortgage. Closed mortgages can be a good choice if

you want a fixed payment schedule, and you don’t plan on moving or

refinancing before the end of the term. An open mortgage allows you to

pre-pay a lump sum or even the entire loan at any time without a

penalty. An open mortgage can be a good choice if you’re planning to sell

your home in the near future, or if you want the flexibility to make lump

sum payments.

What about the term, amortization and payment schedule?

The term is the length of time (usually from six months to 10 years) that

the interest rate and other conditions of your mortgage will be in effect.

Amortization is the period of time (such as 25, 30 or 35 years) over

which your entire mortgage debt will be repaid. Lastly, the payment

schedule sets out how frequently you will make payments on your

mortgage – usually monthly, biweekly or weekly.