Increased competition in the supply of mortgages, as well as changes in borrowers' preferences have led to a dramatic increase in the number of mortgage products available on the market. Borrowers are now faced with far more choice and flexibility in terms of repayment plans, allowing them to select the one that best suits their individual needs.
One option for borrowers to consider is whether to choose an open or closed mortgage loan. Open mortgages allow borrowers to prepay a portion of their mortgage or the entire amount at any time with typically only a small administrative fee. Closed mortgages, on the other hand, prevent borrowers from prepaying their mortgage without penalty, except where they are permitted under the terms of their mortgage contract or by the Interest Act.
The flexibility of open mortgages comes at a higher cost to borrowers, imposing higher interest rates than an alternative closed mortgage with a similar term. Furthermore, open mortgages generally have shorter terms, usually ranging from six months to one year. Another option for borrowers to consider is a convertible mortgage. These are typically short-term closed mortgage loans (usually 6 months or one year), with a fixed rate that allow borrowers to convert their mortgage to a longer term, while locking in at the current interest rate. This option to convert to a longer term at the current rate may be exercised when borrowers expect current rates to rise.
Variable Rate Mortgage (VRM)
This type of loan, also known as a floating or adjustable rate mortgage, differs from a constant payment mortgage because the interest rate charged on the loan may be changed during the term of the mortgage. Generally, these loans are initially set up like a standard, partially amortized loan, based on the current prime rate of interest. The loan is reviewed at specified intervals and if the market interest rate has changed, the mortgage repayment plan is altered by changing either the size of the payments or the length of the amortization period (or a combination of both). For example, a VRM may stipulate that a borrower pays interest equal to "prime minus 0.5%". Variable rate mortgages may also include a cap feature which still allows interest rates to fluctuate, but provides a guarantee to borrowers that rates will not exceed the capped level. This feature provides some security to the borrower while still allowing them to anticipate changes in future rates. Many variable rate mortgages also include the option to convert to a fixed rate. Because there is a wide variety of variable rate mortgage products available from numerous lending institutions, it is imperative that borrowers conduct the proper research in order to select the mortgage with the features that best fit their individual needs.
Vendor Take-back Mortgage (VTB)
This loan is like a conventional first or second mortgage except that it is the vendor who carries the financing. If the VTB mortgage contract rate is different than the market rate, this could affect the perceived market value of the mortgage, in terms of investment analysis.
Zero-Down Payment Mortgage
A zero-down payment mortgage allows borrowers to take out a loan without making a down payment on their purchase as required by other mortgage types. It is usually limited to first time home-buyers of owner-occupied properties who would otherwise be unable to obtain a mortgage because they could not provide a sufficient down payment. The loan typically operates by providing borrowers with a cash back feature of 5% of the purchase price of the home, effectively lowering the down payment to 0%. However, they often require the borrower to provide 1.5% to cover closing costs on the sale, in effect, meaning a 1.5% down payment, not 0%. These loans are often contracted with fixed rates and closed terms of either five or seven years.
Graduated Payment Mortgage (GPM)
This type of loan offers lower payments in early years of the loan which gradually increase over time. The low initial payments may facilitate financing for potential purchasers who otherwise might not have been able to qualify, which increases housing affordability. This type of mortgage has been used primarily with federal government "home ownership" mortgage lending programs, and due to the low interest rate environments, have not been very common in recent years.
Reverse Annuity Mortgage (RAM)
In a reverse annuity mortgage, the lender makes a series of payments or advances to the borrower over the term of this mortgage. At the end of the loan term or upon the death of the borrower, the loan balance, consisting of the accumulated principal advances and the interest due, is repaid by refinancing, by sale of the property, or from the proceeds of the borrower's estate. This innovative mortgage has been introduced in Canada as a means of supplementing aged homeowners' income, typically upon retirement. The arrangement allows the borrower to keep their home for a period of time while subsidizing a low retirement income.
Combination Mortgages
Combination mortgage products get their name from the fact that they switch between a fixed and variable interest rate during contractual term of the loan. A combination mortgage can be thought of as having two payment periods. During the first period, the borrower will be locked into a fixed interest rate. Then, during the second period, the interest rate becomes adjustable and will vary with the prime rate. When a borrower is entering into a combination mortgage they will need to determine the duration of the initial payment period, or the period where the fixed interest rate will be used. This can span anywhere from 2 to 10 years depending on the lending institution and the needs of the borrower.
The combination mortgage is growing in popularity as it offers borrowers peace of mind by incorporating both the fixed and variable rates. In the near future the fixed rate hedges borrowers' risk against increasing interest rates, while the variable rate offsets borrowers' uncertainty of whether interest rates will decrease in the more distant future.
One option for borrowers to consider is whether to choose an open or closed mortgage loan. Open mortgages allow borrowers to prepay a portion of their mortgage or the entire amount at any time with typically only a small administrative fee. Closed mortgages, on the other hand, prevent borrowers from prepaying their mortgage without penalty, except where they are permitted under the terms of their mortgage contract or by the Interest Act.
The flexibility of open mortgages comes at a higher cost to borrowers, imposing higher interest rates than an alternative closed mortgage with a similar term. Furthermore, open mortgages generally have shorter terms, usually ranging from six months to one year. Another option for borrowers to consider is a convertible mortgage. These are typically short-term closed mortgage loans (usually 6 months or one year), with a fixed rate that allow borrowers to convert their mortgage to a longer term, while locking in at the current interest rate. This option to convert to a longer term at the current rate may be exercised when borrowers expect current rates to rise.
Variable Rate Mortgage (VRM)
This type of loan, also known as a floating or adjustable rate mortgage, differs from a constant payment mortgage because the interest rate charged on the loan may be changed during the term of the mortgage. Generally, these loans are initially set up like a standard, partially amortized loan, based on the current prime rate of interest. The loan is reviewed at specified intervals and if the market interest rate has changed, the mortgage repayment plan is altered by changing either the size of the payments or the length of the amortization period (or a combination of both). For example, a VRM may stipulate that a borrower pays interest equal to "prime minus 0.5%". Variable rate mortgages may also include a cap feature which still allows interest rates to fluctuate, but provides a guarantee to borrowers that rates will not exceed the capped level. This feature provides some security to the borrower while still allowing them to anticipate changes in future rates. Many variable rate mortgages also include the option to convert to a fixed rate. Because there is a wide variety of variable rate mortgage products available from numerous lending institutions, it is imperative that borrowers conduct the proper research in order to select the mortgage with the features that best fit their individual needs.
Vendor Take-back Mortgage (VTB)
This loan is like a conventional first or second mortgage except that it is the vendor who carries the financing. If the VTB mortgage contract rate is different than the market rate, this could affect the perceived market value of the mortgage, in terms of investment analysis.
Zero-Down Payment Mortgage
A zero-down payment mortgage allows borrowers to take out a loan without making a down payment on their purchase as required by other mortgage types. It is usually limited to first time home-buyers of owner-occupied properties who would otherwise be unable to obtain a mortgage because they could not provide a sufficient down payment. The loan typically operates by providing borrowers with a cash back feature of 5% of the purchase price of the home, effectively lowering the down payment to 0%. However, they often require the borrower to provide 1.5% to cover closing costs on the sale, in effect, meaning a 1.5% down payment, not 0%. These loans are often contracted with fixed rates and closed terms of either five or seven years.
Graduated Payment Mortgage (GPM)
This type of loan offers lower payments in early years of the loan which gradually increase over time. The low initial payments may facilitate financing for potential purchasers who otherwise might not have been able to qualify, which increases housing affordability. This type of mortgage has been used primarily with federal government "home ownership" mortgage lending programs, and due to the low interest rate environments, have not been very common in recent years.
Reverse Annuity Mortgage (RAM)
In a reverse annuity mortgage, the lender makes a series of payments or advances to the borrower over the term of this mortgage. At the end of the loan term or upon the death of the borrower, the loan balance, consisting of the accumulated principal advances and the interest due, is repaid by refinancing, by sale of the property, or from the proceeds of the borrower's estate. This innovative mortgage has been introduced in Canada as a means of supplementing aged homeowners' income, typically upon retirement. The arrangement allows the borrower to keep their home for a period of time while subsidizing a low retirement income.
Combination Mortgages
Combination mortgage products get their name from the fact that they switch between a fixed and variable interest rate during contractual term of the loan. A combination mortgage can be thought of as having two payment periods. During the first period, the borrower will be locked into a fixed interest rate. Then, during the second period, the interest rate becomes adjustable and will vary with the prime rate. When a borrower is entering into a combination mortgage they will need to determine the duration of the initial payment period, or the period where the fixed interest rate will be used. This can span anywhere from 2 to 10 years depending on the lending institution and the needs of the borrower.
The combination mortgage is growing in popularity as it offers borrowers peace of mind by incorporating both the fixed and variable rates. In the near future the fixed rate hedges borrowers' risk against increasing interest rates, while the variable rate offsets borrowers' uncertainty of whether interest rates will decrease in the more distant future.
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