What Type of Mortgage Should I get?

Fixed-rate
6 month, 1, 2 & 3 year (open, closed and closed-convertible) 4, 5, 7 & 10 year closed.

Variable-rate

3, 4 and 5 year (open, closed, closed-convertible and capped)

Split-term

Combination of all possible terms (6 month through 10 years)
Number of portions depends upon lender…3 is most common; 5 is maximum currently available with some financial institutions.

Self-directed RRSP

A specialty mortgage – term optional – rate within CMHC guidelines.
Invest your own RRSP funds into all or part of your home mortgage.

Description of Types and how they apply to you

Short-term risk and Variable

If rates are low and stable, and/ or you have decided to take the “staying short” strategy regardless…you can generally pay a significantly lower rate (by up to 2%). This is achieved by simply rolling over your term every 6 months, or having your rate float against prime – with the option of locking in to a longer term at a later date. This is not for everyone, however, as sudden upward rate movements, can cause severe stress.

Long-term

Any term 3 years or longer is considered “long term” in today’s economy. Because long-term rates are usually higher than short-term rates, many Canadians who have a choice do not select this option. There are many, however, that consider a long term mortgage necessary due to their exposure to rate increases relative to their inability to manage a significantly higher payment.

Split term

A mortgage which allows you to minimize – or hedge – your interest rate risk by splitting your mortgage into 3 to 5 parts. For example: A $150,000 mortgage could be split into five $30,000 segments with terms of 6 months, 1, 2, 3 and 5 year terms negotiated at today’s best rates. The average rate (say, 6.25%) would rise or fall much more slowly than changes in the market, however, as only the shorter terms are affected by even the most volatile rate movements over the first few years.

Capped ”protected” Variable rate mortgage

In 1993 several Canadian Banks introduced the capped variable rate mortgage, which floats at about prime minus 0.50%, and is capped at either above or below of the 5 year posted rate or at 3 year posted rate (depends on the financial institution) It does offer a way to reduce the risk of floating, while preserving an acceptable long-term rate.