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Overview: This type of loan has a principal that can be pre-paid at anytime. The borrower may pay off the entire mortgage whenever they see fit, as long as it is before the end of the term.
Advantages: There are no penalties or additional interest if you re-negotiate the mortgage. Monthly payments can vary depending on what works well for you.
Considerations: There is a possibility that the interest rate will be higher and may fluctuate depending on whether it is fixed or variable.
Suitable for: Those who are looking for flexibility in their mortgage, or those who have the funds to clear the balance in a short period of time.
Overview: The opposite of an open mortgage, this option does not allow you to pre-pay any of the principal interest and you may not pay off the loan before the end of the term.
Advantages: This product generally offers the lowest interest rates, with a set monthly payment plan. If you shop around you may find a lender who will be able to offer limited pre-payment options without additional interest.
Considerations: You are unable to refinance or pay off the balance before the end of the term. The only way out of this type of mortgage is to sell the property.
Suitable for: Those that will have a steady income and are comfortable with fixed monthly payments.
Overview: This is a pre-determined amount of money that the lender allows you to borrow, similar to a credit card but with a lower interest rate. Eligibility is based on your personal financial situation.
Advantages: You may borrow and pay back as you wish. This gives you the flexibility to access funds when you most need them and the money can be used for anything.
Considerations: You have to be disciplined with your spending since this type of loan can have the same results as a credit card, where some people borrow unrealistically and don’t realize that they’ve exceeded their budget.
Suitable for: Those that are good at managing their resources, and are in need of extra cash.
Overview: A combination of an open mortgage and a closed mortgage, and generally the type of loan that most borrowers prefer.
Advantages: You have the option of pre-paying the principal during the term of the mortgage and may also pay off the balance before the end of the term.
Considerations: If you choose to refinance the balance before the end of the term you will suffer a penalty, which is typically about three months worth of interest payments.
Suitable for: Those that prefer to have more options with their mortgage.
Overview: Available for both commercial and residential buyers, a home construction loan consists of various rates that are based on the value of the land, the scope of construction, and the borrower’s financial history.
Advantages: Many lenders will give you anywhere from 80 to 100 per cent of either the hard costs or the property value based on the information of a certified appraiser.
Considerations: Due to the complexity of the loan it has higher interest rates and closing costs since many things have to be taken into consideration such as budget, and hiring a contractor and an appraiser.
Suitable for: Those that are building a new property.
Overview: Instead of making small contributions towards your investment over a long period of time, this type of loan allows you to borrow a lump sum in order to reach your goals faster.
Advantages: Interest that accumulates can normally be tax-deducted, which could possibly reduce the cost of your investment.
Considerations: There are greater risks involved with this type of investing. You must be prepared in case your investment decreases in value over the term of the loan. If you sell the property you may not receive as much money as you’d anticipated, but you will still be required to pay the full amount of the loan plus additional interest and fees.
Suitable for: Investors
Overview: This type of mortgage is one where the interest cannot surpass a pre-determined amount, even though the loan is variable with a fluctuating rate.
Advantages: Your risk of a high interest rate will be reduced once the loan has been ‘capped’ off, making monthly payments more affordable.
Considerations: Many lenders will only let you take advantage of this option with a closed mortgage that has a five-year term.
Suitable for: Those that want the benefits of a variable rate, with the peace of mind that a fixed rate offers.
Overview: This type of loan has a set maximum amount and is approved before the borrower has found a property.
Advantages: If you have a loan limit in mind it will help you stay within an affordable budget, and will give you greater strength when negotiating the price of the property.
Considerations: The interest rate that is quoted is normally only guaranteed for 30 to 60 days, so it may not leave you enough time to settle on a property.
Suitable for: Those that have a strict budget in mind.
Overview: A loan that is supported by the collateral of another mortgage on a property. The funds that are borrowed are typically used for “extras” such as a vacation property or home renovations.
Advantages: You may have a better chance of being approved for a loan if you provide your property as security.
Considerations: If payments are missed, it could result in seizing of the property that you’ve provided as collateral.
Suitable for: Those that are looking for additional funds for real estate purposes.
We may be neighbours, but in some ways, Canadian and American mortgages are a world apart.
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