Other types of mortgages
You find a house. You decide to buy it. You make a
sensible down payment and get a mortgage for the remainder of the
home's value, locking in at the lowest five-year interest rate.
This is the old-fashioned way of financing a home.
It hasn't gone out of style, exactly, but the historically low interest
rates we've enjoyed recently have set the real estate market on
fire, prompting banks and other lenders to devise inventive new
products to anticipate every type of loan scenario.
The gamut of so-called "alternative" mortgages
appeals to all types of borrowers, from risk-takers to the risk-adverse.
Read on to see where you fit in.
The variable mortgage
This option isn't new, but low rates have generated renewed interest
in variable-rate mortgages. Anticipating that the prime rate will
continue to drop, you take advantage of the lowest rates for a short
period -- usually in six-month increments. Your broker or mortgage
consultant monitors the changing rates and keeps you abreast of
As an illustration, the best six-month variable rate
right now is close to 3 percent, while the best five-year rate is
a little over 5 percent.
"There's a huge spread in those rates, and for
that variable rate to catch up from the three to the low five, it'll
be a significant, significant increase in prime, which is not going
to happen over the short term," counsels Lee Welbanks, a mortgage
consultant with The Mortgage Coach in Toronto.
"Yes, in the five-year term, there is the realistic
possibility that [variable rates] might catch up somewhere down
the line, but taking advantage of the lower interest rate now, on
the early part of your mortgage, is most important, because that's
where you're paying the most interest on it."
The variable rate will mean smaller mortgage payments
in the short term, but the downside is a lack of stability. If you
lock in for five years, on the other hand, you pay the same amount
every month for five years. Not only that, you can project how much
you'll have paid off at the end of that period.
With a variable rate, interest rates are adjusted
every six months, which means your monthly payments will likely
change every six months. As a result, you simply can't divine how
much you'll have paid off in five years. Luckily, if the market
becomes too volatile for you to bear, you can lock into a fixed
term at any point.
The long-and-short mortgage
Introduced by Scotiabank earlier this year, this product tries to
exploit the inherent advantages of a fixed term (constancy and peace
of mind) and a variable plan (lower interest) by splitting your
mortgage into two different interest rates.
On a $300,000 mortgage, half would be locked in a
five-year fixed term and half would float at a variable rate that
is reset every six months. That might mean paying 5.25 percent (for
five years) on $150,000 and 3.75 percent (right now) on the other
$150,000. If rates start to climb, you can lock the variable portion
While this scheme may pose a compromise, it forces
homeowners to think about their mortgage not as one sum but two
competing entities. Given the current trend in interest rates, in
the near term, a couple that takes a long-and-short mortgage is
bound to pay less total interest on their mortgage than a couple
that locks the total $300,000 in at 5.25 percent.
If rates rises and you decide to lock in the variable
half of your mortgage, the new five-year rate will inevitably be
higher than the already secured half of your mortgage. Meaning:
you might have been better off financing the total sum at 5.25 percent
to begin with.
The no-money-down mortgage
A purchaser must come up with at least five percent of the sum of
a mortgage in order to be underwritten by the nation's two mortgage
insurers, the Canada Mortgage and Housing Corporation (CMHC) and
GE Capital Mortgage Insurance Company (GEMICO). Some wannabe buyers,
however, can't muster a 5-percent down payment.
So lenders introduced the no-money-down mortgage,
or cash-back mortgage, in which the bank gives you 5 percent of
the total mortgage of your house in order to sign you up as a borrower.
This scheme has ushered a lot of buyers into the market, but it's
not without its drawbacks.
A cash-back mortgage commands a higher interest rate,
higher insurance rate and high monthly payments. Unless you expect
a salary boost, this scheme could make you house-poor. And should
you want to opt out of the mortgage before the end of its term,
you have to pay back a portion of your "gift" to the bank.
"I typically try to steer people away from it,"
says Ann Pope, a mortgage consultant for Assured Mortgage Services
in Toronto. "Because if they can wait even a couple of months,
they can usually come up with the five percent themselves."
To read more about no-money-down mortgages, click
The interest-only mortgage
This plan is also pitched at people who don't have much money upfront
but may be anticipating a windfall at a later stage in ownership
of the home. In this situation, your monthly mortgage payments only
settle interest charges.
"It won't drain your cash flow the way a principal-and-interest
payment will," says Welbanks.
This is an attractive opportunity for people who want
to earn income as landlords. They can purchase the house, begin
to reap the benefits of being paid rent and write off the mortgage
interest on their taxes (something you can't do on a principal residence).
Because you're only servicing the interest, however,
you won't make a dent in the principal until you have the wherewithal
to start making larger monthly payments.
The blend-and-extend mortgage
This option exists for people who are already in a fixed-term mortgage
and want to take advantage of dropping rates. Let's say you're in
the second year of a five-year fixed term at 6.5 percent and you
notice that your lender is advertising a five-year rate to new customers
of 5 percent.
Envious, you inform your lender that you want a piece
of that action. The bank respects your loyalty, but would be foolish
-- on a business level -- to set you up with a lower rate without
some sort of recompense. First, they strike a compromise by "blending"
the two interest rates -- to reach, say, 5.8 percent. This factors
in both rates and still compensates the bank for its troubles.
And then there's the "extend" part. The
deal requires you to take a term that's equal to or longer than
your remaining mortgage commitment, which in our example is three
years. This type of refinancing may prove more cost-effective than
moving your mortgage to another lender and incurring a penalty --
or it may not. It would depend on the rate a different bank was
ready to offer.
Andre Mayer is a freelance writer