A necessary step in finding affordable Toronto mortgage rates is to know the different types of mortgages that are available to you.
Fixed Rate Mortgage (FRM) – In a fixed rate mortgage, the interest rate and monthly payment will remain the same throughout the term of the loan even if interest rates change in the prime market. Lenders may offer a fixed interest rate for 1-year, 2-year, 3-year, 4-year and even 10-year terms. There are lenders who will also offer 15-year and 25-year terms. The most popular among borrowers is the 5-year term mortgage. Choosing a longer term will give you the security of having your mortgage payments exactly the same for the entire duration of your loan. These types of mortgages usually have the lowest rates among all other types of mortgages and are the most popular choice among borrowers in Toronto.
Variable Rate Mortgage (VRM) – Some homeowners in Toronto choose a variable rate mortgage, also known as adjustable rate mortgage (ARM), even though it can be risky because the interest rate is typically lower than that of a fixed rate mortgage and they offer more flexibility and less penalty in case you need to break the term. In a variable rate mortgage, the interest rate and monthly payments can go up or down on usually a monthly basis depending on how the interest rates are doing in the market. If interest rates go down, the borrower can save a lot of money. If interest rates go up, payments will also increase. The 5-year variable mortgage is the most popular in Canada.
50 / 50 Mortgage – This may be the right mortgage for homeowners who are unsure whether to go for a variable rate mortgage or a fixed rate mortgage. With this type of mortgage, 50% will be locked at variable interest rate and 50% will be on a 5 year fixed term. The two will be independent of each other, so you can choose to make prepayments on the fixed rate amount which has the higher interest rate, or you can pay down the portion with the variable rate substantially and take advantage of lower interest charges when rates drop, thereby minimizing any further risks of interest fluctuations.
High Ratio Mortgage – A mortgage which has less than 20% down payment is considered a high ratio mortgage. With this type of mortgage the borrower is required to purchase mortgage insurance which can be made through one of Canada’s three insurers – Genworth, CMHC or Canada Guaranty.
Open Mortgage – In an open mortgage, you have the option to make lump sum payments or pay off the whole amount of the loan without being charged a penalty. This is a good choice if you are expecting a sum of money that will allow you to pay back the full mortgage within 6 months to 1 year.
Closed Mortgage – In a closed mortgage you will be charged a lower interest rate than with an open type mortgage, but if you make large payments or pay the loan off earlier than the term of the loan then you will incur steep penalties.
In large Canadian real estate markets such as Toronto mortgage rates can be a complicated process. With rates going up and down unpredictably, it pays to do your homework and keep a close eye on the market to be able to lock in the better, lower mortgage rate.
