Types of Mortgages in Canada

Canadian mortgages differ in more than the rate. They can be open or closed, fixed or variable, and insured or not. Here is each type in plain language so you can tell which one fits you.

Conventional mortgage

A conventional mortgage has a down payment of 20% or more. You do not need mortgage default insurance.

Open mortgage

You can pay it off in full or in part at any time with no penalty. The rate is higher. It suits people who expect to sell or pay off the loan soon.

Closed mortgage

A closed mortgage has a lower rate, but you pay a penalty if you pay it off early, refinance or break it before the term ends. Most closed mortgages still let you prepay some each year, often 10% to 20% of the original amount, with no penalty.

Variable-rate mortgage

The rate moves with your lender’s prime rate. With many variable mortgages your payment stays the same, but the split changes:

• If rates go down, more of each payment goes to your balance.
• If rates go up, more goes to interest. If the payment no longer covers the interest, the lender will raise it.

Some variable mortgages are adjustable, which means the payment itself changes when prime changes. Most lenders let you lock into a fixed rate at any time without a penalty, as long as the new term is at least as long as what is left on the old one.

Fixed-rate mortgage

The rate is locked for the whole term. You know from day one:

• Your rate for the term
• Your payment
• How much of each payment goes to principal and interest
• What you will owe at the end of the term

Breaking a fixed mortgage early can cost a large penalty, called the interest rate differential (IRD).

Alternative (B) and private mortgages

These come from trust companies, mortgage investment corporations or private investors. They cost more but accept files the banks will not, such as bruised credit or hard-to-prove income. They are usually short-term. See the types of lenders.

Insured, insurable and uninsurable

Insured

If you put down less than 20%, your mortgage must be insured against default by CMHC, Sagen or Canada Guaranty. You pay the premium, usually added to the mortgage. Insured mortgages often get the lowest rates because the lender’s risk is low.

• Purchase price must be under $1.5 million
• The home must be owner-occupied
• Maximum amortization is 25 years, or 30 years for first-time buyers and new builds
• Not available for refinances

Insurable

You put down 20% or more, but the mortgage still meets the insurance rules, so the lender can insure it in bulk at its own cost. Rates are a little higher than insured.

• 20% or more down
• Purchase price generally under $1 million
• Amortization of 25 years or less
• Owner-occupied

Uninsurable

The mortgage cannot be insured at all. Rates are usually a bit higher again. Common examples:

• Rentals you will not live in
• Homes over the insurable price limit
• Amortizations over 25 years with 20% or more down
• Refinances

Term vs amortization

Amortization is the total time to pay off the mortgage, usually 25 or 30 years. The term is how long your current contract lasts, from six months to ten years. Five years is the most common. When the term ends, you renew. That is when you can change lenders without a penalty.

How lenders decide what you can afford

Lenders use two ratios. GDS is the share of your gross income that goes to housing costs. TDS is the share that goes to all debts. You must also pass the stress test: you qualify at the higher of your rate plus 2% or 5.25%.

Your credit decides which lenders will look at you and at what price. And think about timing: if you might sell, move or refinance in the next few years, a shorter term or a variable rate can save you from a big penalty.

Talk to us

There is no best mortgage in general, only the one that fits your next five years. Book a call with Lisa or Kelly, or phone 289-723-2126.

Common questions