How to Choose the Right Mortgage Loan

In Canada, if you plan to purchase a home, more than likely you are interested in learning about the various types of home mortgage loans that are available. A mortgage is nothing more than a loan that uses the home you purchase as collateral. This means if you do not repay the loan as specified in your mortgage agreement, the lender will retain the home to resell in order to obtain the money you borrowed.

Many different institutions lend money to those looking to purchase a home including pension funds, finance companies, credit unions, trust companies, and banks. Choosing the right home loan is essential as it can affect your overall financial health. Getting the mortgage loan depends on a lot of things and qualifying for them is also important. You can even obtain loans on bad credit, but it comes with a few limitations.

In order to obtain a loan, you should be aware of the different types of loans that are available in Canada so you can make an educated decision on the one that will fit your needs the best.

Here are some of the types of mortgage loans you can acquire:

Conventional Mortgage Loans

A conventional mortgage loan is one that will provide you around 80% of the appraised value of the home or in some cases 80% of the purchase price of the home. To obtain a conventional mortgage, the home buyer will be required to pay a down payment of 20% of the purchase price upfront.

High-Ratio Loans

A high-ratio mortgage is one that will provide you around 80% of the purchase price of the home. With this type of loan, you will be required to pay around 5% of the purchase price as a down payment. This type of loan does require the home buyer to carry mortgage loan insurance. This type of insurance will protect your lender if you cannot pay back the mortgage loan. In the majority of cases in Canada, lending companies are required to have mortgage insurance by law.

Open Mortgage Loans

An open mortgage is one in which you can repay the loan in full or in part without paying any penalty cost. In the majority of cases, this type of loan has a higher interest rate than closed loans but is often chosen if you plan to make extra payments or if you are a plan to sell the home in a short amount of time after purchasing.

Closed Mortgage Loans

A closed mortgage is one that does not allow the home buyer to make any extra payments and will charge a fee or penalty for those that wish to pay the mortgage off before the term of the loan. The interest rate offered by this type of loan is usually lower than other mortgages.

Fixed Rate Mortgage

A fixed rate mortgage is one in which the interest rate will not change at all during the term of the mortgage. With this type of home mortgage loan, it is easier to manage the payoffs as the interest rate doesn’t change. You can set your monthly budget accordingly to manage your debt payment. Fixed five-year mortgage loans are one of the most common types of home loans in Canada.

Variable Rate Mortgage

A variable rate mortgage is one that has interest rates that change according to the changes seen in the financial market. In the majority of cases, the amount you pay monthly will remain the same but the amount of money that goes for the principle will be different. One benefit of this type of mortgage loan is that you can get benefits when the interest rate falls in the market.

Convertible Mortgage Loans

A convertible mortgage loan allows you to change the loan terms at any point without acquiring any penalty. You can change your variable loan to a fixed rate loan or a short term loan to a long term loan whenever you want. The interest rate will change according to the changes in the loan type.

Hybrid Mortgage Loans

In this type of loans, the borrowers are allowed to combine two types of loans like fixed-rate loans with variable loans. Under this scheme, you can divide the loan amount into a variable loan and fixed rate loan. The terms of payment vary according to the type of loan. For instance, with a fixed rate loan your interest rate will be fixed, and with a variable loan, the interest rate will switch based on the current market trends.

The Bottom-Line

You have a lot of options when it comes to mortgage loans. Choose the right loan based on your requirements so that you can comfortably pay them off without putting a strain on your financial health.

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