Buying a home is an exciting milestone, but navigating the world of mortgages can be daunting, especially for first-time buyers. In Canada, there are several types of mortgages with different mortgage rates available, each with its own features and benefits.
Understanding these options can help you make informed decisions that align with your financial goals and circumstances. In this article, we’ll explore the different types of mortgages and mortgage rates available in Canada.
Conventional Mortgage Rates
I will not talk about a specific rate because as you know, mortgage rates fluctuate very often. Conventional mortgage is a type of mortgage with one or more criteria that are different from the high ratio mortgage guideline.
Back in a day, if you want to purchase a home, you’ll need a minimum of 20% down-payment. if you’re trying to buy a home, you know saving up for down-payment is one of the biggest challenge for first time home buyers.
With a conventional mortgage, the lender takes on more risk of default because there is no involvement of the insurer. For this higher risk, the lender charge a slightly higher mortgage rates to compensate for it. Despite the slightly higher interest rate, you’ll gain other benefits in return.
First, with conventional mortgage, you might not need to purchase the mortgage default insurance, which is about 2.8% – 4% of total borrowed amount in saving. Lenders are also a bit more relaxed if your ratios is off limit (by a little).
Conventional mortgages split into two further categories; they are insurable or uninsurable. Insurable is when the mortgage meets all the criteria set out under high-ratio mortgage. I will discuss the criteria in detail a bit latter down the article.
You guessed it, Uninsurable mortgage has higher risk for the lender, therefore, higher mortgage rates.
High Ratio Mortgage Rates
To make homeownership more affordable and possible for more people, entered the insurers. Essentially, the insurer will pay the lenders for any shortfall as the result of borrowers default on their mortgages. Because of this, the insurers take some risk from the lender, thus the lenders offer a lower interest rates. In exchange, you’ll have to pay premiums (2.8% – 4%; more for self employed applicants) for the mortgage default insurance. With this set up, it’s possible for you to become homeowner with as little as 5% for down-payment.
To qualify for a high ratio mortgage, you need to meet the following criteria.
Down-payment: less than 20%
Maximum amortization period: 25 Years
Maximum Home Price: $1M
Purchase purpose: Home-owner occupied
No Frill Mortgage Rates
Imagine your mortgage was a car. When you buy a car, you have an option of buying a bare minimum model with no additional features or options at the lowest price. In mortgages, we call these mortgages no-frills.
While no-frills mortgages may present with lower, more appealing interest rate, beware. Because they don’t have additional features, the no-frill mortgages might cost borrowers more with their inability to prepay, bona fide sale clause, etc.
Be sure to talk to your mortgage broker before committing to this type of mortgage.
Short Term Rate Relief
Some lenders offer a short term, usually the first 6 month for a substantially lower interest rate compare to the market. True North mortgage employs this strategy well. After the first 6 months of lower interest rate, the current lender requires you to renew with them at the market rate which might or might not be best rate. If you choose not to renew and want to go with another lender, there will be a fee you need to pay. I’m not saying this is good or bad, I’m simply sharing information so you can dig further and make a decision for yourself.
Rental Property Mortgage Rates
When you purchase a home to rent out, the interest rate will be higher. With you as home owners not living in the rental property, this present additional risk to lender because renters might not take good care of the property like you would.
In addition to different mortgage types, whether you choose fixed rate mortgage or a variable rate mortgage will also have an impact on what interest rates you will get. Be sure to ask your mortgage broker or specialist questions to clearly understand what types of mortgage you have.
As always, if you have any questions about mortgages, I’m always happy to help.
Thanks for reading and I’ll see you in the next article.