Closed Ratio/Fixed Mortgage
The expression ‘closed mortgage’ originates from the 1980′s when this type of mortgage was literally ‘closed’. You contracted to the lender to make your payments for the term chosen, you could not pay anything additional, nor could you pay off the entire amount for any reason except the sale of your property. These days, there are many ways to pay down your mortgage principal quicker, though the name ‘closed’ mortgage still remains. See pre-payment options for ways to pay off your mortgage quicker. Fixed rate mortgages are the most popular type of mortgage. You benefit from the security of locking in your mortgage interest rate, for lengths of time ranging from 3 months up to 25 years. The rates are slightly lower than for an open mortgage for the same term. If you think interest rates could rise, you may want to choose a longer term, such as a 5 or 10 year term. If you think that rates are going lower, you may want to gamble on a shorter length of time. Discuss this with your mortgage broker. The major lending institutions have different pre-payment options allowed under their contracts. These options allow you to pay off your mortgage faster. It is also possible to pay off most closed mortgages prior to the end of the term or pay down a portion of the balance owing. However, lenders charge penalties for doing so. Please note that some lending institutions will not give any pre-payment options. It is wise to find out what options are available before entering into any mortgage contract.
If you have at least 25% of the purchase price (or appraised value if this is lower than the purchase price) as a downpayment, you can apply for a conventional mortgage.
Some lenders will require CMHC insurance because of the property’s location or type, even though you have 25% or more equity.
These are fixed rate mortgages for terms of 6 months or 1 year. Not all lending institutions offer convertible mortgages. With a convertible rate mortgage you can lock into a longer term during the current term of your mortgage without penalty – but only with the same lender. For example, if after a couple of months you hear that interest rates are going to increase, you may change to a longer term mortgage such as the 5 year term.
If you have between 5% and 25% of the purchase price as your downpayment, you can apply for a high-ratio mortgage. Usually these have to be insured through CMHC (Canada Mortgage and Housing Corporation) or GE (GE Capital). These are mortgage insurance companies. Purchasing insurance is a common way of qualifying for a mortgage when you have less than 25% equity. The insurance premium is charged only once (per mortgage), when the mortgage funds are advanced. You can pay the premium yourself, but most people choose to add the funds on top of the mortgage.
An open mortgage allows you to pay off part or the entire mortgage at any time without penalties. Open mortgages usually have short terms of six months or one year. The interest rates are higher than those for closed mortgages with similar terms.
At the start of a variable rate mortgage, the lender will calculate a mortgage payment that includes principal & interest. For the term of the mortgage your payments usually do not change. However, as the prime rate changes so will your mortgage rate. If interest rates are dropping, less of each payment will go toward interest and more will go toward principal. If interest rates rise, more of your payment will be interest and less money will be reducing your principal. Some of these mortgages are completely open (you can pay off all or part of your mortgage at any time without penalties). Others that offer a ‘prime minus’ interest rate (e.g. prime – 0.375%) may charge a penalty. The interest rate on most variable rate mortgages is compounded monthly.