What makes the different types of mortgages unique?
There are a lot of things you need to know when navigating the mortgage world.
And, if you’re not careful, it’s pretty easy to get confused by the lingo, procedures, and payments. (Not to mention the penalties.)
This is why we recruited Jérôme Trail, owner and certified broker at The mortgage path, to answer the most important questions buyers and homeowners need to understand before moving forward with their mortgage process.
Today, Trail offers the answer to a two-part survey: “What is the difference between fixed and variable mortgage rates, and how are open and closed mortgages different?“
READ: What happens if I miss a mortgage payment?
“A fixed mortgage rate is a fixed rate (and the associated payment) over the term of the mortgage term, which is typically five years in Canada,” says Trail.
An adjustable rate mortgage, on the other hand, is priced against the lender’s prime rate, Trail says. This type has the ability to fluctuate – up and down – over the term of the mortgage.
“If the lender’s prime rate goes up, so will your mortgage rate,” when it is a variable rate.
Meanwhile, Trail explains, open and closed mortgages also differ: For starters, an open mortgage has no limit on prepayment amounts. It can be reimbursed at any time, without penalty.
“The downside is that these types of mortgages always come with a premium. For example, the average Canadian chartered bank today has a fully open mortgage rate of around 7%.
On the flip side, Trail describes a closed mortgage as a “generally much lower price than a fully open mortgage,” for example, it can reach 2-3% in Canada today.
But, he says, in these cases, “there are prepayment limits that must be observed.”
With an overview of these different types of mortgages, one may wonder which combination will work best for them and why. Trail can also meet this demand.
First, there is the option of a closed fixed rate mortgage.
“This is the fixed rate usually offered by lenders,” says Trail. “There’s a good chance you won’t see this mortgage until that maturity date, so you better read the terms and conditions carefully. “
Second, one could opt for a closed variable rate mortgage. Trail explains that this is the variable rate typically offered by lenders. In this case, “this borrower is fine with a little risk of fluctuating interest rates over the life of the mortgage.”
Then, an open mortgage at a fixed rate. Trail says these rates are “generally quite high” and would generally make more sense if the mortgage was only required for a short period.
“This is quite often the case when borrowers turn to new lenders at maturity, because it is not always easy to get the new mortgage started, transparently, on the maturity date.”
Finally, you can imagine that some borrowers are looking for an open variable rate home loan … But Trail can direct you there: “I don’t think a lender really offers this type of product,” he explains.
Have another mortgage question or looking for mortgage advice? Contact Jérôme at the Mortgage Trail – mention STOREYS and you will receive a free evaluation!
This article was produced in partnership with STOREYS Custom Studio.
Jérôme has built a successful mortgage brokerage on a commitment to service, attention to detail and honesty. In 2020 alone, he helped 38 first-time buyers climb the real estate ladder. Strong industry connections and business experience help her turn refinancing, reverse mortgage, chopper and more into solutions that help grow her clients’ equity and wealth.