Types of Mortgages in Canada

On this page

When financing your home in Canada, many mortgage options are available to suit every borrower’s unique needs. Understanding the types of mortgages and their features and benefits can help you decide the most suitable choice for your home financing or refinancing needs. 

In this article, we will explain the mortgage financing options available, their features and benefits, and what type of borrower they are most suitable for, whether you’re a first-time buyer, renewing, or refinancing.

---

Key Takeaways

• Various types of mortgages are available in Canada, each catering to different financial situations and needs.
• The type of mortgage you opt for will influence your interest rate, repayment terms, and the flexibility to make additional payments or transfer the mortgage.
• Working with a mortgage expert can help you simplify the process of selecting the right mortgage and ensure you choose the best solution for your circumstances.

---

High-Ratio Mortgages

High-ratio mortgages are exclusively for homebuyers with a downpayment of less than 20% of the purchase price. High-ratio refers to a loan-to-value (LTV) ratio exceeding 80% of the property’s value. These types of mortgages are sometimes referred to as insured or default-insured mortgages. 

A high-ratio mortgage cannot exceed a purchase price of $1.5 million and requires mortgage default insurance. Default insurance protects the lender, reducing their risk if you default on your mortgage payments. Canada has 3 mortgage loan insurance providers: Canada Mortgage and Housing Corporation (CMHC), a crown corporation, and private insurers Canada Guaranty and Sagen.

First-time homebuyers could benefit from high-ratio mortgages due to the smaller downpayment requirement. Downpayments and closing costs are significant barriers for first-time buyers entering the housing market. Interest rates on high-ratio mortgages are typically lower, as there is a reduced risk to lenders since they are default-insured. Insurance premiums are added to the total mortgage amount, or can be paid in cash by borrowers.

Conventional Mortgages

Conventional mortgages are for borrowers who can afford a downpayment of 20% or more or who are purchasing a home valued at $1 million (insurable) or $1.5 million (insured) or more. These types of mortgages are sometimes referred to as uninsured mortgages. With this type of mortgage, you are not required to pay for mortgage default insurance, as the equity from the downpayment is sufficient to protect the lender. 

Homebuyers who can afford a 20% or more downpayment can benefit from this type of mortgage by avoiding the additional cost of default insurance. The interest-carrying cost savings from not including default insurance premiums on your total mortgage amount can be substantial over the life of the mortgage. Conventional mortgages also benefit those purchasing in areas with high living costs, as there is no price cap on the purchase price of a home.

Additionally, putting down 20% or more as a downpayment provides you with more equity in your home from the start, potentially lowering mortgage payments and interest-carrying costs over the life of the mortgage. However, conventional mortgages typically have higher interest rates than high-ratio mortgages, which could offset any savings.

Insurable (Low-Ratio) Mortgages

Insurable mortgages are for borrowers who can afford the required 20% or more downpayment and purchase a home valued at less than $1 million. Default insurance isn’t mandatory; however, depending on the lender, either the lender or borrower can insure the mortgage to access lower rates and lowering the lender’s default risk. 

Typically, the lender backend insures this type of mortgage, known as low-ratio or portfolio insurance. Still, the borrower may be required to cover the mortgage insurance premium if the lender doesn’t. When default-insured, you will have access to interest rates that are almost as low as high-ratio mortgages. An insurable mortgage cannot have an amortization period of more than 25 years to qualify as low-ratio.

Fixed-Rate Mortgages

Fixed-rate mortgages have a principal and interest amount that remain the same throughout the mortgage term. This type of mortgage provides stability and predictability with mortgage payments that won’t change if interest rates change. 

Homeowners who have less risk tolerance, prefer stable payments or are on a set budget benefit the most from fixed-rate mortgages. These types of mortgages are also suitable if interest rates are predicted to increase, as you will be locked into a rate for a fixed period of time, helping you to ride out any increases in interest rates.

However, fixed-rate mortgages have historically had higher interest rates than variable-rate mortgages. If you break a fixed-rate mortgage before your term ends, the penalty could be quite high, as it is calculated based on the interest rate differential (IRD) or three months of interest, whichever is higher. 

Typically, all fixed-rate mortgages carry prepayment penalties, which are higher if the interest rate at the time of early payout is lower than the mortgage’s contract rate. In such cases, the lender would need to make up for the lost revenue in interest costs, as the borrower will be able to re-borrow that money at a lower ongoing rate.

Variable-Rate Mortgages

Variable-rate mortgages have interest rates that fluctuate with changes in the Bank of Canada’s policy interest rate. There are two types of variable-rate mortgages: adjustable-rate (ARM) and variable-rate (VRM). 

Adjustable-rate mortgages (ARMs) are a type of variable mortgage in which the payment adjusts up or down based on changes to the lender’s prime rate. The principal portion will remain fixed throughout the term, but the interest portion will adjust to reflect changes in prime rates. If interest rates increase, your mortgage payments will increase. If interest rates decrease, your mortgage payments will decrease. 

Variable-rate mortgages (VRM) are a type of variable mortgage with fixed payments. This means your mortgage payments will remain the same throughout the term, regardless of changes to interest rates. However, your principal and interest portions will adjust based on changes to the lender’s prime rate. 

If interest rates increase and you have a VRM, more of your payment will go toward interest, decreasing the principal portion. If interest rates decrease, more of your payment will go toward the principal, decreasing the interest portion. Adjustments by the Bank of Canada to its benchmark policy rate during your mortgage term on a VRM will impact your amortization.

VRMs risk hitting trigger rates or trigger points when interest rates continue to increase. A trigger rate is reached when your mortgage payment entirely goes toward interest, with nothing going toward the principal. Your trigger point is reached when your payment is insufficient to cover even the interest portion on the mortgage. When this happens, you risk negative amortization on your mortgage, meaning you owe more than the original mortgage amount.

Homeowners with the risk appetite and finances to adjust their budgets in response to interest rate changes will benefit from both types of variable mortgages. Variable-rate and adjustable-rate mortgages typically carry lower interest rates than fixed-rate mortgages, resulting in lower mortgage payments. 

If interest rates remain low, variable rates have the potential to save you money in interest-carrying costs. Additionally, the penalties for breaking the term early are typically lower than those for fixed-rate mortgages, with a penalty calculation typically limited to 3 months of interest. 

Open, Closed, and Convertible Mortgages

Open, closed, and convertible mortgages offer different levels of flexibility in terms of what you can do with your mortgage. These mortgage solutions let you customize the best option for your mortgage strategy to reach your financial goals.

Open Mortgages allow homeowners to make extra payments or pay off the entire mortgage balance before the term ends without penalty. An open mortgage can be beneficial if you anticipate additional money, such as an inheritance or substantial bonus, that you wish to use toward the mortgage or plan to pay off your mortgage sooner than the end of its term. 

This flexibility typically comes at the cost of higher interest rates than closed mortgages. However, the tradeoff will result in much higher interest-carrying costs if you don’t take advantage of this flexibility.

Closed mortgages limit mortgagors to how much they can prepay toward their mortgage each year. Typically, most mortgages are implicitly closed unless stated otherwise and will have lower rates than open mortgages. This is a beneficial option if you plan to stay in your home for the entire mortgage term or don’t anticipate having the extra funds above your annual prepayment limits to put toward your mortgage. 

Lenders typically allow you to make a certain percentage of the mortgage balance, usually 10% to 20%, as a prepayment each year without penalty. Breaking or paying off the mortgage before the term ends can result in significant prepayment penalties. 

Convertible Mortgages allow homeowners the flexibility of a short-term mortgage (typically 6 months) with an option to switch to a longer term at any time. This option can be beneficial if you are unsure how long you plan to stay in your home or anticipate that interest rates may decrease before the end of your term. 

Convertible mortgages have the same prepayment restrictions as closed mortgages during the term. However, the trade-off is lower interest rates than with open mortgages. This makes them appealing to those who want short-term flexibility while avoiding higher borrowing costs. 

Chattel Mortgages

A chattel mortgage is a type of loan used to finance movable property rather than real estate. This type of mortgage usually applies to manufactured homes, mobile homes, or other dwellings that are not permanently attached to land. Unlike a traditional mortgage, where the lender registers a charge against the land title, a chattel mortgage is secured against the asset itself. This means the collateral is treated more like personal property than real estate.

Chattel mortgages are most commonly used in situations where the property does not meet standard real estate lending criteria, as the property and land are not on the same title. In these cases, lenders cannot register a charge on the land, so a chattel mortgage is required instead.

Property types include:

• Mobile homes located in land lease communities
• Manufactured homes not permanently affixed to a foundation
• Properties on leased land where the borrower does not own the lot
• Certain rural or seasonal dwellings that do not qualify for traditional financing

How Chattel Mortgages Work

With a chattel mortgage, the lender has a lien on the asset. If the borrower defaults, the lender has the right to repossess the asset, similar to how car loans work. Borrowers are still assessed based on income, credit, and debt service ratios. Chattel mortgages are considered higher risk compared to traditional mortgages. 

As a result:

• Interest rates are typically higher
• Amortization periods may be shorter
• Fewer lenders offer these products
• Qualification criteria may be stricter

Chattel Mortgage vs Traditional Mortgage

The difference between a chattel mortgage and a traditional mortgage comes down to what is being financed and how the loan is secured. A traditional mortgage is secured by land and property on the same title, which tends to appreciate over time and provides stronger collateral for lenders. A chattel mortgage is secured only by the asset itself, which is treated as personal property and a depreciating asset, increasing the risk for lenders. 

Types of Mortgage Registrations

When you obtain a mortgage, the lender will need to register your mortgage as a charge or lien against the subject property’s title. This allows the lender to secure the loan and legally claim the property should you default. There are two types of mortgage registrations: standard mortgages and collateral mortgages.

Standard Mortgages

Standard mortgages involve the lender registering the mortgage (charge) and securing it for the exact dollar amount. Borrowers will have limited options for making changes to the mortgage or accessing additional funds. If you need to access equity, you would need to arrange a second mortgage or refinance. However, standard charge mortgages allow switching or transferring the mortgage at renewal to a new lender without having to be paid off or discharged first. 

Collateral Mortgages

Collateral mortgages involve the lender registering the mortgage (charge) for an amount that exceeds the actual mortgage amount. This charge covers on-demand loans, also known as re-advanceable mortgages, which allow borrowers to access the equity in their home as the mortgage is paid down. These funds can be accessed at any time without refinancing the mortgage. 

Collateral mortgages can include multiple mortgage products, such as home equity lines of credit (HELOCs), re-advanceable credit facilities, and hybrid mortgages. The federal mortgage regulator reduced the limits on the re-advanceable portion for collateral charge registrations in Canada from 80% to 65% of the subject property’s valuation. 

Mortgage Features

Homeowners should consider various features when choosing a mortgage. Depending on your mortgage goals, these features can provide additional flexibility and benefits.

Portable Mortgages

Portable mortgages allow homeowners to transfer their existing mortgage to a new property without incurring penalties for breaking the mortgage. This is beneficial if you plan to sell your current home and purchase a new one. Porting the mortgage will allow you to keep your existing mortgage while transferring the interest rate, remaining term, remaining amortization, loan terms, and mortgage balance to the new property. 

However, depending on your situation, you may have limitations or conditions. You could incur prepayment penalties if the new property is less than your remaining mortgage balance. If the new property is more than your current mortgage, you will need a new mortgage amount and may be required to blend your current interest rate with a higher rate. Also, if your current mortgage is insured or insurable and the new property you purchase is valued at $1 million or more, you may not be able to transfer the mortgage.

Assumable Mortgages

Assumable mortgages allow homebuyers to assume an existing mortgage from the current homeowner. The buyer would take over the original mortgage contract and continue making the remaining mortgage payments under the same terms and conditions. This is a beneficial option if interest rates have increased since the original mortgage was obtained.

Not all mortgages are assumable. In most cases, the lender must approve the buyer’s assumption of the mortgage. You may be required to make a large downpayment to assume the current mortgage or take out a second mortgage to cover the remaining balance owed to the seller that the existing mortgage doesn’t cover, if there is significant equity in the home from the seller. The seller could still be at risk of recourse if the buyer misses any future payment on the assumed mortgage.

Blended Mortgages

Blended mortgages allow homeowners to combine their existing mortgage rate with a new rate, extending the mortgage terms. These types of mortgages are a beneficial renewal option if interest rates have fallen and you want to blend and extend into a new rate and term to secure a lower interest rate without refinancing. Blending and extending will give you a better rate that falls somewhere between the two rates based on a weighted average determined by how much time is left on your current term.  

Cash-Back Mortgages 

Cash-back mortgages provide the borrower with a cash incentive from the lender. When the mortgage is finalized, you will receive a lump sum, either a fixed dollar amount or a percentage, in addition to your mortgage amount. These funds can be used for immediate financial needs, such as furniture for your new home, paying debts, repairs and renovations, or moving expenses.  

True cash-back mortgages allow the borrower to pay down debt at the time of the mortgage transaction, thereby achieving a lower total debt service ratio (TDSR) for mortgage qualification.

Homeownership Structures for Mortgages

If more than one person is purchasing and financing the home through a mortgage, the ownership structure is important to consider when protecting your homeownership rights. The two common structures are tenants-in-common and joint tenancy. 

Tenants-in-Common Mortgages

Tenants-in-common mortgages mean that each co-owner has a share in the property. This share can be specified as a percentage based on financial contributions. Each owner has the right to leave their share to any beneficiary, next of kin, or heir upon death. 

This option is suitable for situations where 2 or more individuals will hold an interest in the property, such as friends purchasing a home. This structure allows owners to sell or transfer their shares without needing consent from the other co-owners. 

Joint Tenancy Mortgages

Joint tenancy mortgages mean that each co-owner has an equal share in the property. If a co-owner passes away, their share automatically transfers to the other co-owner(s). Each owner has an equal share of the property, and each co-owner must approve any changes before they occur. This option is suitable for spouses or partners who purchase property together and want to ensure the property goes to the surviving co-owner(s) upon the death of one of the owners. 

Alternative Mortgage Solutions

Alternative mortgage solutions provide additional options for those with unique financial circumstances who would not qualify for traditional lending. 

Private Mortgages

Private mortgages are offered by companies or individuals who lend their money. These types of mortgages are often used by borrowers who cannot qualify under the strict lending criteria of a prime lender for various reasons, such as poor credit, property location or condition, being over-leveraged, unverifiable or irregular income sources, or foreign income sources. 

This solution typically has higher interest rates, additional fees, and shorter loan terms than traditional lending sources. Regulated private mortgages, also known as syndicated mortgages, require an exit strategy, as they cannot typically be sustained over the long term without a very high risk of default. 

Second Mortgages 

Second mortgages allow homeowners to take out another mortgage on an already mortgaged property. This will enable you to borrow against the equity you have built up without altering your existing mortgage. A second mortgage will fall behind the original or first mortgage, and if you default on your mortgage payments, the first mortgage will have priority when recovering funds. 

These mortgages can be structured as a home equity line of credit (HELOC), a home equity loan, or a private mortgage. However, if you have a second mortgage and wish to switch lenders, you may be required to refinance rather than renew. Any second mortgage would need to be paid off, or the new lender would need to grant a mortgage postponement to approve the switch.

Reverse Mortgages 

Reverse mortgages are typically available for homeowners aged 55 or older. Like HELOCs, they use the equity in your home to give you access to up to 55% of the home value in cash on a tax-free basis. The maximum allowable amount will depend on the lender, your age, and the home’s appraised value. Loan repayments are deferred until you sell, move, or the death of the last borrower occurs. Reverse mortgages offer the benefit of being non-income qualified (NIQ) and are most suitable for older Canadians who typically have equity but lack the income to qualify.

Vendor Take-Back Mortgages

Vendor take-back mortgages (VTB) allow the buyer to finance the property through the seller. The seller acts like a private mortgage lender; you would make regular payments to them instead of a bank, as with a traditional mortgage. This can be ideal for those who cannot qualify for a mortgage. 

This type of mortgage can only be offered if the seller owns the property outright without a mortgage. Interest rates could often be much higher, and the terms could be shorter than typical mortgage options available through regulated lenders.    

Halal Mortgages

Halal mortgages are mortgages that comply with Islamic law, which prohibits the payment or receipt of interest. Some Canadian lenders are now offering halal mortgages as an alternative lending solution to help meet the needs of homebuyers. These mortgage solutions are ideal for Muslim homebuyers who cannot obtain a home loan through traditional interest-bearing mortgages. 

Frequently Asked Questions (FAQ) About Mortgage Types in Canada

Final Thoughts

A wide range of mortgage solutions is available in Canada, designed to suit the diverse needs of homeowners and homebuyers. Whether you’re a first-time buyer, refinancing, or renewing, there is a mortgage solution for you. 

The right mortgage for you depends on your unique circumstances. Consult a nesto mortgage expert at nesto who can help you narrow down your search and find the solution best suited to your needs.

---

Why Choose nesto

At nesto, our commission-free mortgage experts, certified in multiple provinces, provide exceptional advice and service that exceeds industry standards. Our mortgage experts are salaried employees who provide impartial guidance on mortgage options tailored to your needs and are evaluated based on client satisfaction and the quality of their advice. nesto aims to transform the mortgage industry by providing honest advice and competitive rates through a 100% digital, transparent, and seamless process.

nesto is on a mission to offer a positive, empowering and transparent property financing experience – simplified from start to finish.

Contact our licensed and knowledgeable mortgage experts to find your best mortgage rate in Canada.

---