What are the different types of mortgages available in Quebec?
Are you about to apply for a mortgage? Before embarking on this process that ultimately leads to the purchase of your brand new home, there are likely to be plenty of questions about your options. To help you see things more clearly, here are the different types of mortgages available.
The different types of mortgages offered in Quebec
The closed mortgage
One of the first choices you will face when shopping for your mortgage is whether to opt for a closed or an open mortgage. Let's start by seeing what a closed mortgage is. The latter means that you will be unable to change your mortgage contract during its term. Modifications may be desired in order to take advantage of a better interest rate.
What's more, it might be more difficult for you to prepay if that's what you want to do. Indeed, it is possible that certain restrictions and fees are imposed on you, whereas these would have been spared if you had opted for an open mortgage. Be aware, however, that the conditions applicable to requests for prepayments vary from one lender to another, so it is a good idea to check with the various institutions through which you will be shopping for your mortgage. We should conclude by pointing out that the interest rate offered with a closed mortgage is generally lower than that offered with an open mortgage.
The open mortgage
For its part, the open mortgage allows you to make advance payments at any time without having to incur additional costs. In fact, you may even be able to fully repay your loan before the end of your contract (regardless of its duration), while also avoiding the payment of additional fees.
However, we must be careful to mention that this type of mortgage is only offered for short-term contracts. Since these may be as short as six months or a year, it stands to reason that they are not for everyone. In addition, the interest rate offered is often higher than that of a closed mortgage.
Despite the disadvantages mentioned previously, open mortgages offer high accommodating flexibility for those who wish to make additional payments in addition to their regular payments and thus, reduce the amortization period of their loan. While this type of mortgage is quite popular for this specific reason, it can, unfortunately, be a bit more difficult to obtain than a closed mortgage.
Subsidiary mortgage vs conventional mortgage
The conventional mortgage
When we discuss the different mortgage options, it is rare that the distinction between a collateral mortgage and a conventional mortgage is discussed. In order to remedy the situation and highlight the differences between them, let's start by establishing what the terms of a conventional mortgage consist of.
As part of this type of package, the amount at which your mortgage will be registered will equal the amount of your mortgage. So if you apply for a $ 250,000 mortgage, the amount your mortgage is registered with will also be $ 250,000.
As a result, you will not have any additional money secured through your mortgage to finance other projects such as renovations. If there is a need for financial leeway, it will be necessary to register a new mortgage. Of course, you will also have to qualify for it and pay the costs associated with obtaining this type of mortgage, unless the lender decides to do so for you.
Regular or high ratio conventional mortgage?
If you choose a conventional mortgage, you will face two options: whether to opt for a regular mortgage or to opt for a high ratio mortgage. As long as you are able to pay a down payment of 20% of the purchase price of your property, you are able to take out a regular mortgage. As a result, you are fortunate that you do not need to take out mortgage insurance.
With regards to a high-ratio mortgage, this applies to buyers with a down payment of less than 20% of the purchase price of the property. You should know that if you are unable to reach the 20% threshold, you will still have to be able to pay 5% of the first instalment of $ 500,000 as well as 10% of what exceeds this amount.
We must repeat that in such a case, you will have no other choice but to sign up for mortgage insurance. How much will you pay for the latter? Without giving an exact answer to this question, we should point out that the lower your down payment, the higher your insurance premium.
The subsidiary mortgage (accessory or collateral guarantee)
As part of a collateral mortgage, it is possible to register a mortgage for an amount greater than the loan initially granted. This action makes it possible to borrow the difference between these two amounts later, thus making additional funds available that can be used to finance various personal projects.
This option offers a big advantage over the conventional mortgage: not having to refinance or re-register the mortgage because the amount you will need later is already guaranteed upon. In turn, this helps avoid the expense of registering a new mortgage when refinancing your loan. Note that a subsidiary mortgage covers not only the building itself but also the land on which it is located. In addition, note that a collateral mortgage can be used to secure other debts.
The stress test: does it ring a bell?
If you've had to get mortgage insurance, your lender may ask you to take a stress test. The latter is designed to ensure that regardless of rising interest rates (to which you are particularly vulnerable if you have taken out an adjustable-rate mortgage), you will be able to pay off your mortgage. The test you will be subjected to will be based on the interest rate set by the Bank of Canada over a 5-year period.
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