How Mortgages work in Canada 🏡 🏦

🗞 Leisurely Readings

Canada has Open and Closed Mortgages (each of them also offer Fixed and Variable types). The easiest way to understand these two is that an Open Mortgage gives you more flexibility for a higher interest rate while a Closed Mortgage gives you less flexibility for lower interest rates than Open.

Open Mortgages

✅

• No prepayment penalties

• (Generally speaking) Switch to another lender anytime

❌

• Much higher interest rates (e.g. a closed 5-yr variable can be found as low as 1.50% today while the lowest open 5-yr starts at 3.45%)

Closed Mortgages

✅

• You get the best interest rates (some sample rates). Most popular mortgage type is a 5-year variable rate

❌

• Limitations on how much extra payment can be applied before incurring penalties (typically extra prepay payments can be up to 10%-20% of the total mortgage. Frequency of these vary and could be once per year to multiple times a year)

• Switching to another lender only worthwhile when savings outweigh the potential penalties

What about Downpayment?

If you try out a few mortgage rate calculators, you’ll realize that the rates differ based on how much downpayment you put in (makes sense) but interestingly, you get the best rates if your downpayment is below 20% or above 30% (in some cases closer to 35%). That’s because when your downpayment is below 20%, you are required to get a mortgage insurance which reduces the risk for the lenders. Whereas if your downpayment is above 30% or 35%+, in the event of a downturn, the risk for going negative on the real estate is relatively lower as well.