Which Mortgage is Right for You?
There are many different types of mortgages available to homebuyers, and the type of mortgage you choose will depend on your unique circumstances. Here are a few of the most common types of mortgages, which we will go more into detail below. You can click on a mortgage type to jump to that section:
- Draw Mortgage (also known as Construction Mortgage)
- Open Mortgage
- Hybrid Mortgage
- Reverse Mortgage
- Cash Back Mortgage
- Blended Rate Mortgage
- Convertible Mortgage
Find a lender to learn more about which mortgage is right for you.
What is a Draw Mortgage?
Most of the time, people who are buying new homes and making all of the design decisions have to take out a draw mortgage. In this case, the builder is able to “draw” on the mortgage at designated intervals while they’re building. Typically, they take one-third of the money at the beginning, one-third in the middle, and one-third at the end.
A buyer who has a draw mortgage is responsible for making payments on the mortgage as soon as the builder draws on it, typically it is for interest only but there may be draw fees as well. Often, this means they’re making payments on two mortgages at the same time: their current mortgage and the one on the home they’re building. Once the new home is finished, the mortgage changes into a more traditional mortgage, and they’re able to sell their current home.
You also might be curious about the differences between a draw mortgage vs a construction mortgage.
What is an Open Mortgage?
Choosing the right mortgage for your needs, budget, and financial goals can be the difference between saving money or incurring unexpected costs. Lenders offer a vast array of products with varying options, one of which is the choice between open and closed mortgages.
An open mortgage offers more flexibility, allowing the borrower to increase payment amounts either incrementally or as a lump sum, or pay off the mortgage early with no penalties. There are no repayment restrictions in an open mortgage.
Closed mortgages are fixed and charge a penalty if the borrower wishes to make a lump sum payment or pay off the mortgage early. Closed mortgages are more common among borrowers for their competitive interest rates. However, there are benefits to opting for an open mortgage as opposed to a closed one.
Benefits of an Open Mortgage
Repayment flexibility may be ideal for certain borrowers. If you’re expecting an injection of income, either from a wage increase, inheritance, or if you’re self-employed with fluctuating income, you may wish to choose an open mortgage. With this type of mortgage, you’ll be able to use that extra income to pay down your mortgage principal without penalty.
In another scenario – if you are close to paying off your mortgage entirely, an open mortgage could be the right choice for you. Having the ability to add lump sum payments to your mortgage without penalty, as well as increasing regular payment amounts will help pay off your mortgage sooner. And although open mortgages come with a higher interest rate, if you’re close to paying off your mortgage the benefits outweigh the interest incurred.
An open mortgage is a smart choice if you plan to sell your home sometime during the current term of your mortgage. You won’t be tied to selling your home at a certain time, such as within the last year of your term, to avoid penalties since there are none.
Is an Open Mortgage Right for Me?
This type of mortgage is typically offered at a higher interest rate than closed mortgages, often at least 1% more than fixed closed mortgages. It’s worth exploring how much interest you will incur over the term of the mortgage and weighing it against the increased payments or lump sum you intend to apply within that term.
Open mortgages are offered with shorter terms – usually under five years – but because of the flexibility of this product, the borrower doesn’t have to hold it until its maturity. If you have made your additional payments or find a change in your financial status, it is simple to convert your open mortgage into a fixed closed mortgage for better predictability and a lower interest rate.
An open mortgage is a great solution for property investors who may be looking to create equity faster to use toward the down payment on another property. It also benefits investors looking to sell a property in the short term to build their portfolio.
If you have a limited budget and aren’t expecting to be able to make lump sums or increased regular payments, a fixed closed mortgage may be a better solution for you.
An open mortgage allows you the freedom to pay down your mortgage faster with flexible repayment options. For specific borrowers, this mortgage type can save you thousands of dollars in interest and help pay off your home much sooner than a closed mortgage. Be sure to speak to a mortgage specialist and weigh the benefits and risks of an open mortgage to learn if this mortgage type is right for you.
What is a Hybrid Mortgage?
Finding the right mortgage for your new home purchase can save you thousands of dollars in interest. There are many types of mortgages available, including fixed and variable interest rates, that give you the flexibility to choose the right solution for your needs. But did you know there’s an option to mix the two, giving you what’s called a hybrid mortgage?
A hybrid mortgage combines both fixed and variable interest rates, usually splitting your mortgage amount 50/50 between the two. For example, if your mortgage amount is $400,000, $200,000 will be applied to a fixed-rate term, with the other $200,000 to the variable rate term.
This type of mortgage is ideal for those who want to take advantage of variable rates, as they can be lower than fixed, but also want less risk in the possibility of fluctuating interest rates. The fixed portion acts as a cushion against rising rates.
Advantages of a Hybrid Mortgage
Since a portion of the mortgage is set to a fixed rate, you as the homeowner is better able to work within a budget for payment amounts. Only a portion of the mortgage is variable, so there is less fluctuation in the mortgage payment.
This is a good solution for those who want to take advantage of the lower interest rates variable mortgages offer, but still have some form of predictability in terms of a monthly payment.
Both fixed and variable portions of the mortgage are on different terms, so you have more flexibility in timing your renewals. For example, you can have your fixed portion on a five-year term, while having the variable on a one-year term. This allows you, after one year, to reassess the variable portion of your mortgage and make decisions on whether to change your mortgage or continue on the same terms.
Having this much control over your mortgage gives you the decision-making power to pay your mortgage off sooner. With two segments of your mortgage on two different terms, you have more options for payment and amortization schedules.
Lenders can offer initial fixed teaser rates, which are typically lower than standard fixed rates. In addition, when your fixed-rate term expires, the interest rate at which your lender can renew the mortgage is capped. This means not only will you benefit from lower mortgage payments to start, but when it comes time to renew you won’t be faced with large interest rate increases.
Disadvantages of a Hybrid Mortgage
Despite the flexibility of a hybrid mortgage, it’s rare for interest rates to be any more competitive than completely fixed or variable mortgages. The introductory rate lenders offer can easily be cancelled out by the fluctuating variable rate portion of your mortgage.
If the two parts of your hybrid mortgage are on different amortization schedules, it can be very difficult to shop out the mortgage when it comes time for renewal. You may find that to move to a new lender, one portion of your mortgage may be subject to penalties for early termination. It’s usually better to set both parts of your mortgage on the same term to avoid this potential headache.
The variable portion of your mortgage can create instability in your mortgage payments. As with a standard variable mortgage, the rates are flexible and are based on current market trends. When the market heats up, you may find your payments reaching heights you weren’t expecting. This could potentially affect the interest savings you had expected.
Hybrid mortgages must be refinanced at the time of renewal, which typically comes with additional fees. This could cut into the savings you incurred during the term of your mortgage.
A hybrid mortgage is a more complicated product to consider but depending on your specific needs it may be the right choice for you. Benefits include the potential for interest savings, flexibility in payments and amortization schedules, and the savings of a variable mortgage mixed with the reduced risk of fixed rates.
If you weigh your options carefully before choosing this type of mortgage, you’ll be sure to choose a solution that saves you money and helps build your financial future. Speak to one of our Area Managers today to find out how a hybrid mortgage could work for your new home purchase.
What is a Reverse Mortgage?
If you’ve ever seen a television commercial offering a reverse mortgage to help you pay bills or obtain a lump sum against your home’s equity, you may be wondering what it is and how it works. With so many products available by lenders to help you access your home equity, what makes a reverse mortgage different?
A reverse mortgage is a specialized product available exclusively to those over 55 years of age who intend to remain in their existing home indefinitely, or at least for many more years. This type of mortgage is unlike a traditional mortgage in that there are no monthly payments and no repayment of the funds until you either sell the home or your estate settles your obligations.
With a reverse mortgage, you can take up to 55 percent of your primary home’s equity as either monthly payments or a complete lump sum to help supplement existing income, pay debts, or any other financial need. This is money you don’t need to worry about paying back until you sell the home if you ever do.
What Are The Risks Of Taking A Reverse Mortgage?
In Canada, there are only two lenders that offer this type of product: Equitable Bank and HomeEquity Bank. Due to this limited competition, coupled with the nature of the loan (lenders not receiving their money back for many years) interest rates on a reverse mortgage are higher than that of conventional home equity products.
However, despite this type of mortgage incurring interest, you’re not obligated to make payments. The interest and principal balance are due at the time of sale or when your estate settles the amount owing.
Depending on the lender and your mortgage terms, there may be no options to repay a reverse mortgage before you sell your home. If this is the case, once you take this type of loan you’re locked in, which could mean anyone intended to inherit your property or the proceeds from its sale may receive much less than expected as the equity is tied to repayment of the mortgage.
Why Would I Want To Choose A Reverse Mortgage?
Despite the risks, there are many benefits to taking advantage of this type of loan. Primarily, a reverse mortgage helps you remain in your existing home longer if your current income isn’t enough to sustain the expenses. This can be key after retirement when your monthly income is limited.
Your current retirement savings may not be enough to sustain monthly expenses after you stop working. A reverse mortgage can provide additional monthly payments to supplement your income during this time.
If you find at some point you need additional care and don’t want to leave your home, a reverse mortgage can provide you with the funds needed to pay for in-home care or other related expenses.
A reverse mortgage can be a backup plan if you find you don’t qualify for other, more traditional types of home equity loans. In most cases, you’ll be approved for this type of mortgage, even without proof of income documentation. If your home has equity, you can take advantage of a reverse mortgage.
The money you borrow using this product is also tax-free, so you won’t need to worry about additional taxes owing in the coming years.
What Are The Typical Conditions I Need To Meet To Quality For A Reverse Mortgage?
There are a few key things to keep in mind:
- You can only take a reverse mortgage against your primary residence. Any secondary homes such as a cabin or vacation property are not eligible for this type of loan.
- Any other mortgages existing on the home must be paid off at the time the reverse mortgage is applied. Your reverse mortgage lender must be able to register first priority against your property for repayment.
- Your primary home must be located in an area the bank typically lends on AND is a type of home that fits the requirements.
- All registered owners of the home (names appearing on the title) must agree to be co-borrowers on the reverse mortgage.
- Any loans secured against the home must be less than the amount of equity you’re seeking to borrow.
A reverse mortgage can be a great solution to many financial needs. If you’re 55 or older and have equity in your home, you can take advantage of this product and use the money for anything you need. It can supplement your monthly income, pay debts, finance renovations, secure in-home health care, or simply allow you better financial freedom. It’s important to weigh your options carefully to ensure that this type of loan is right for your needs, and for your future.
What Is a Cash Back Mortgage?
Moving into a new home is an exciting time, but sometimes there can be some additional expenses you want to prepare for. For these circumstances, lenders can offer a specific type of mortgage – a cash back mortgage – to provide you with the funds you need to cover these expenses.
These extra costs typically include things like buying new furniture and window coverings, appliances, or even paying down existing debt to make your new mortgage payment easier.
A cash back mortgage allows you to receive up to 5% of your mortgage principal amount in the form of a lump sum at the time of closing. For example, if your mortgage principal amount is $400,000, you can receive up to $20,000 in cash back. Some lenders offer a higher cashback value, up to 7% of your principal amount; you’ll want to shop potential mortgage lenders to find the best solution to suit your needs.
This type of mortgage is unique in that it doesn’t require specific uses for the funds, so it can be used freely to cover any type of expenses you may need.
When Is It Ideal To Take A Cash Back Mortgage?
Taking a mortgage with a cash back option is something to be carefully considered. Like the standard principal amount on your mortgage, the outstanding balance is subject to interest. Taking advantage of this option also means it’s subject to the interest incurred by taking the lump sum.
Furthermore, this type of mortgage is typically offered at a higher rate of interest than that of other mortgages. However, if you have high-interest debt to pay off, this option can be worth the payments and interest as it can reduce your overall outgoing funds. It can also be a better option than high-interest credit cards or lines of credit to help pay for landscaping or home improvements.
Your cash back mortgage is subject to the same terms as any other mortgage. If you sign up for a five-year fixed mortgage, for example, you’re obligated to fulfill this term and make payments on time. Should you need to break the mortgage before your term is up for renewal, you may be required to pay back the cash back amount – in full or in part – at the time of mortgage cancellation. Lenders have different policies in this regard, so it’s best to familiarize yourself with the terms of this type of mortgage before signing the agreement.
Potential Uses For A Cash Back Mortgage
Cash back mortgages are a great solution for first-time buyers who may have more expenses than other homeowners on their first home purchase. Additionally, for homeowners building a brand-new home, a cash back mortgage can help offset the costs of landscaping, fencing, and other factors to completing a new home. This lump sum can also pay for the closing costs and other associated fees related to a home purchase.
The funds from a cash back mortgage can also help you supplement your income in the months following your move. Moving can be stressful, and the extra funds may help to alleviate some of the stress from additional expenses and time away from work.
Not all lenders offer this type of loan, so it’s important to shop for your mortgage to find the best solution for your unique needs. However, a cash back mortgage can be the answer to a variety of financial needs after you move into your new home. After all, moving into a new home should be a positive experience and a cash back mortgage will take care of any associated or upcoming expenses.
What Is a Blended Rate Mortgage?
When it comes to buying a home, you actually have a variety of choices in your mortgage – it’s not one-size-fits-all. We recently talked about a cash back mortgage, and today we’d like to take a look at a blended rate mortgage.
When you purchase your home, signing up for that five-year fixed-rate mortgage may seem like the right decision, especially if the interest rate is low. However, you may encounter opportunities to take advantage of even lower rates or wish to access your home equity during the term of your current mortgage.
This is what blended rate mortgages are for.
A blended rate mortgage is a way to take advantage of lower rates or access your equity without paying expensive penalties to break your current mortgage term. Your lender combines your existing interest rate with an available lower rate, and they may or may not require a term extension.
For example, if your current mortgage interest rate is 3.95% and the current available rate is 2.19%, your lender will convert your mortgage to an interest rate somewhere in between. There are two types of blended rate mortgages: Blend and Extend, and Blend to Term.
A blend-and-extend mortgage is exactly what it sounds like – taking your current mortgage, mixing it with a new one, and extending the term. In this case, your lender will blend the interest rates on your current mortgage and that of the new, lower interest rate mortgage. With this option, the clock will reset on your term. For example, if you have two years left on your five-year fixed mortgage at a 4.95% interest rate, and you’re looking to take advantage of a new interest rate of 2.95%, you’ll get a new five-year fixed mortgage at a rate somewhere between those two rates.
Typically, you’d break your current mortgage early and be subject to expensive prepayment penalties, but with this type of blended rate mortgage, you’ll avoid these penalties and renew your mortgage at a lower rate.
A blend-to-term mortgage is similar to blend-and-extend, but you don’t extend the remaining term of your existing mortgage. Since your lender will be losing out on the interest you would have paid at your current higher rate, this type of mortgage comes with conditions.
As an example, it is usually only offered if you’re also accessing your home equity which increases the principal mortgage amount. If you’re not accessing equity but wish to take advantage of this option, your lender may require you to pay a portion of your prepayment penalties.
Is a Blended Rate Mortgage the Best Option?
Several factors need to be considered to determine if choosing a blended rate mortgage is the right solution to your needs.
- Avoid expensive prepayment penalties. Depending on how many years left you have in your current term, choosing a blended mortgage may save you thousands of dollars in interest.
- Take advantage of dropping interest rates. Although mortgage interest rates have been at record lows for quite some time, you may find the currently available rates are lower than that of your current mortgage. In that case, it’s worth looking into a blended mortgage rather than waiting out your current term.
- Access your home equity. If you have a healthy amount of equity in your home, you may choose to use it to pay down other debt, perform home repairs, or other expenses. A blended rate mortgage will help you take advantage of these available funds.
- Prepayment penalties may be less than your blended interest over the new term. Be sure to calculate the actual dollar amount of penalties you’d pay to break your mortgage and compare it to the interest you’ll accumulate during the term of your blended rate mortgage.
- Blended mortgages come with restrictions. This type of mortgage cannot be transferred to a new property if you move.
- There may be fees attached to changing your mortgage. Even though you’re avoiding prepayment penalties, there may be other fees attached to the processing of this change.
Deciding what type of mortgage is best for your unique needs means doing your due diligence in weighing your financial options. Speak to your lender to discuss refinancing options, and whether the interest saved or equity accessed by moving to a blended rate mortgage is beneficial to you.
What Is a Convertible Mortgage?
While it’s true closed fixed-rate mortgages are most commonly chosen for their predictability, it could be worth your while to check out a convertible mortgage, as it offers some great benefits for many home owners.
A fixed-rate mortgage comes with hefty penalties should you find interest rates have dropped and you wish to refinance your mortgage early, or if you wish to put down a lump sum payment against the principal. But choosing a convertible mortgage for your home can give you flexibility in terms of interest rates, payment frequency, and lump sum payments leading to significant savings over time.
A convertible mortgage is a type of open mortgage where you start with either an adjustable or fixed interest rate, but you have the ability to convert into a closed mortgage at any time during your term without penalty.
Every mortgage lender offers different options when it comes to convertible mortgages. Some only offer adjustable rates during the convertible period of your loan, while others may offer the option to start with a fixed interest rate.
Benefits to a Convertible Mortgage
There are many situations where a convertible mortgage is a good choice. If interest rates are expected to decrease, it may be prudent to sign up for this type of mortgage and watch the trends in the market for the right time to convert.
A Convertible Mortgage Offers Freedom
Convertible mortgages also give you more freedom when it comes to payment amounts and lump sum payments toward the principal without penalty. Many lenders offer flexibility in increasing payment amounts, some up to double the payment, with the extra amount applied directly to the principle. Lump-sum payments are also permitted without penalty but have limits based on a percentage of the mortgage amount.
Once you decide it’s the right time to convert to a closed mortgage, you’re free to choose any fixed-rate term available from your lender which is typically anywhere from one year to ten, with the best rates offered usually in a three-to-five-year term.
It’s Less Expensive to Convert
Convertible mortgages are less expensive to change into another type of mortgage. With closed mortgages, there are penalties involved. Depending on how far away you are from your term’s maturity date, these penalties can be in the tens of thousands of dollars. While convertible mortgages come with additional fees to convert, they’re significantly less costly.
If you’re looking for more flexibility in your mortgage to take advantage of low interest rates and extra payments, this mortgage type might be right for you.
Drawbacks to a Convertible Mortgage
Adjustable interest rates can be unpredictable, and if the prime lending rate increases so will your payments. Even if you choose to sign up for a fixed rate in your convertible mortgage, you may find the interest rates are increasing and could lose the opportunity to convert to a closed mortgage at the right time. Like any other type of open mortgage, there is risk involved.
Lenders typically charge additional fees at the time of conversion to a closed mortgage. It is worth investigating whether the interest saved during the conversion outweighs the fees applicable to the transaction.
Many lenders require a minimum time commitment for the mortgage to remain convertible before it can be changed. This can result in missed opportunities to lock in a lower interest rate.
Convertible mortgages give you more control over your financial situation. This mortgage type is a great compromise between the risk of adjustable-rate mortgages and the hefty penalties of a fixed-rate mortgage.
By choosing this product, you have the freedom to place additional payments toward your principal without penalty and watch the market trends for a lower interest rate to lock in at the right time. These benefits put you in control of your savings and help you pay down your mortgage sooner.
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