Different Types of Mortgages

Most individuals require a mortgage to purchase their home, but the provisions of the mortgage agreement can be difficult for people to understand. Below is a look at some of the most common terminology that borrowers will encounter:

Different Types of Mortgages

Open vs Closed Mortgages

An open mortgage is a mortgage where the borrower can pay off all or some portion of the mortgage before maturity without incurring a prepayment charge.

A closed mortgage is a mortgage where the borrower cannot pay off the mortgage before maturity without incurring a prepayment charge. Some closed mortgages contain prepayment privileges.

Prepayment Privilege vs Prepayment Charge

Prepayment privileges permit the borrower to make additional payments on their mortgage without incurring a penalty. The most common types of prepayment privileges are lump sum payments or increases to regular monthly payments.

Prepayment charges are penalties charged by the lender for paying off a mortgage before maturity or for going over the prepayment privilege amount(s). The prepayment charge is usually the higher of three months of interest or the interest rate differential.

Fixed vs Variable Rate Mortgages

For a fixed rate mortgage, the interest rate is locked-in for the term of the mortgage and will not change.

For a variable rate mortgage, the interest rate will fluctuate over the term of the mortgage based on the prime rate.

Conventional vs High-Ratio Mortgages

A conventional mortgage is a mortgage loan up to a maximum of 80% of the appraised value (or purchase price) of the property.

If the borrower is borrowing more than 80% of the appraised value of the property, that is referred to as a high-ratio mortgage. High-ratio mortgages must be insured against default through mortgage default insurance.

Mortgage Default Insurance

Mortgage default insurance is an insurance product that protects the lender if the borrower defaults on the mortgage. The insurance premium is paid by the borrower and is calculated as a percentage of the mortgage loan amount. Mortgage default insurance is required for high-ratio mortgages.

Conventional vs Collateral Charges

A conventional charge is where the mortgage registered against the property cites the terms of the mortgage agreement, including the actual amount of the loan, the interest rate, and the maturity date.

A collateral charge is where the mortgage registered against the property is for a higher amount than the mortgage loan amount and for a higher interest rate. The purpose of a collateral charge is to permit the borrower to borrow additional money from the lender in future without having to incur the cost of registering a new mortgage against the property.

If you are weighing your mortgage options, connect with a mortgage expert at Brown Beattie O’Donovan. We’ll help you understand the terms of your mortgage.