What are the different types of mortgages available in Quebec?

Are you about to apply for a mortgage? Do you know what type of mortgage best suits your needs ?

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, lets explore the different types of mortgages available.

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.

Additionally, it might be more difficult for you pay off your mortgage faster if that's eventually what you want to do. Indeed, it is possible that certain restrictions and fees would be 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 early repayment 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

On the other hand, 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, 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.

The conventional mortgage

In the context of a conventional mortgage, the amount at which your mortgage will be registered will equal the amount of your loan. 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, if you decided to do so you will 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 that is equal 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 loan insurance.

A high-ratio mortgage 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 at least have to be able to pay 5% of the first instalment of $ 500,000 as well as 10% of what exceeds this amount.

In this a case, you will have no other choice but to sign up for mortgage loan insurance. How much does it cost ? Without giving an exact answer to this question, we should point out that the lower your down payment, the higher your insurance premium.

You want to learn more about your borrowing capacity ? To do so, read the following article How to assess your borrowing capacity 

The subsidiary mortgage (accessory or collateral guarantee)

In the context of a collateral mortgage, it is possible to register a mortgage for an amount greater than the loan initially granted. It makes it possible for you 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. Additionally, this helps you avoid the expenses 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, a collateral mortgage can also be used to secure other debts.

The stress test: does it ring a bell?

If you've had to get mortgage insurance, it is possible your lender asked you to take a stress test. It 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.

Should you choose a fixed rate or a variable rate ? To help you make your decision consult our article on the subject. 

Learn more about mortage by reading our Practical guide to understanding your mortgage.

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