Types of Mortgages. The word mortgage is a French term meaning “dead pledge,” apparently meaning that the pledge ends (dies) either when the obligation is fulfilled or the property is taken through foreclosure.
In a highly competitive market, mortgage companies and banks are always updating and extending their range of mortgages. The list is already extensive enough to baffle all but the most determined of home owners when shopping for a new mortgage.
A high-ratio mortgage is a loan that is above 75% and up to 95% of the purchase price or appraised value of the home, whichever is less. These mortgages must me insured against loss by either Canada Mortgage and Housing Corporation (CMHC), a Federal Government Corporation, or GE Capital, a private insurer. The premiums can be added to the mortgage amount or paid at closing.
When interest rates fall, many borrowers want to renegotiate their mortgages but a few have the right to do so, unless their mortgages are fully open. But if you obtained a longer-term mortgage, insured by CMHC, you can prepay it on payment of 3 months interest penalty – a lot cheaper than the Interest Rate Differential (IRD), which is the difference between the mortgage rate and current rates, on the outstanding balance, for the rest of the mortgage term.
In Canada and the US, a number of more or less standard measures of credit worthiness are typically used. Common measures include payment to income (mortgage payments as a percentage of gross or net income); debt to income (all debt payments, including mortgage payments, as a percentage of income); and various net worth measures. In many countries, credit scores are used in lieu of or to supplement these measures. There will also be requirements for documentation of the creditworthiness, such as income tax returns, pay stubs, etc; the specifics will vary from location to location.
A closed mortgage offers the security of fixed payment for terms from 6 months to 10 years. The interest rates are considerable lower than open, and if you are not planning on any one of the above reasons, then choose a closed mortgage. Nowadays, they offer as much as 20% prepayment of the original principal, and that is more than most of us can hope to prepay on a yearly basis. If one wanted to pay off the full mortgage prior to the maturity, a penalty would be charged to break that mortgage. The penalty is usually 3 months interest, or interest rate differential
When rates are are moving downward, or there are indications that they will in the near future, a 6 month convertible mortgage offers you the short term commitment at fixed payments, with the added advantage that during the term, the mortgage is fully convertible to a longer fixed term from 1 year to 10 years. At the end of the 6 month period, the mortgage becomes fully open, where one can renew with the existing lender or transfer to another lender. Even though it is offered at many banks, there are many differences from one to the next.