For most people, a mortgage will be the biggest financial decision they make in their lifetime. With so many different types of mortgages available, it can be hard to know which one is right for you. So, let's take a closer look at the different types of mortgages and how they work.
A fixed-rate mortgage is the most common type of loan. With this type of loan, your interest rate stays the same for the entire term—usually 5 years—which makes it easier to plan and budget for your monthly payments. Historically, fixed-rate mortgages also tend to have higher interest rates than other types of loans, making them less affordable over time.
Variable-Rate Mortgages (VRMs)
A variable-rate mortgage (VRM) is a type of loan where the interest rate changes periodically based on an index such as the Bank of Canada prime rate. VRMs usually start out with a lower interest rate than fixed-rate mortgages, but there’s always a risk that the rate will go up over time, which risks making it more expensive in the long run. That said, VRMs may be a good option if you plan to move soon or if you want to take advantage of historically low mortgage rates while they last.
Hybrid loans are a combination of fixed-rate and variable-rate mortgages. Hybrid loans can be attractive because they combine some of the benefits of both fixed- and adjustable-rate loans without having to commit too strongly to either one type or another upfront. While you can choose to put different segments of your mortgage into a fixed or variable rate, the most common combination is a 50/50 split, in which half the mortgage amount collects interest at a fixed rate and the other half collects interest at a variable rate. Each portion of the mortgage is subject to different terms, however.
Amortization with respect to residential is the expected length of time it takes the borrower to pay back the loan. This is different from a Mortgage Term which only defines the attributes of a loan for a sub period within the amortization. For example if a 500,000 loan is amortized over 25 years, and the borrow takes a 5 year term for the first 5 years of loan payback, he/she will renegotiate the terms of the loan at the maturity of the 5th year, typical called a renewal. The attributes of the loan can include interest rate, open/closed and terms.
There are several different types of mortgages available today, each with its own advantages and disadvantages depending on your situation and financial needs. Understanding these options can help you make an informed decision about which type of loan is best for you in your particular circumstances. Whether you’re looking for a low initial interest rate with an VRM or more stability with a fixed-rate mortgage, there’s sure to be an option that meets your needs!