Best Mortgage Rates in Canada 2020

Fixed-rate mortgages have a set interest rate for the life of the loan. Regardless of economic fluctuation, you pay the same interest rate. A variable-rate typically remains the same for an initial term, then resets based on the current market rates. This means your variable rate could go up or down, affecting the size of your payment or how much of the payment is applied to the principal.

Some lenders offer a protected variable rate. After the initial term, the interest rate changes according to the market but it cannot exceed a predetermined cap rate. There may also be a predetermined minimum rate, in the event that market rates drop.

Fixed-rates are often slightly higher than variable rates. This is because interest rates are assumed to increase over time, so the variable rate will likely increase when it resets. The lenders estimate in an effort to balance the two.

Not to be confused with the “amortization period” (which is the entire time it takes to repay the mortgage), the “term” is the initial period before rates and other agreed-upon elements of the mortgage can change. This can be anywhere from 6 months to 5 or more years. After the term ends, interest rate and payment arrangements may be renegotiated if you find something more in your favor.

In an open mortgage, you are free to pay off the mortgage at any time, with no penalties. You can also renegotiate the mortgage at any time. A closed mortgage has a set amortization period and paying early will result in prepayment penalties.

You can save substantial amounts of interest by paying an open mortgage off early but they typically come with higher interest rates. If you plan to pay your mortgage more quickly than the required, make sure the interest saved by prepayment makes up for the higher interest rate.

Although some lenders and programs can work with much smaller amounts, the typical down payment is 20% of the home’s price. If you’re able to get a mortgage with less than 20% down, you’ll be required to purchase CMHC mortgage insurance, which protects the lender if you default on the loan. Make sure you consider this cost when you compare rates.

In addition to the down payment, remember to plan for closing costs. Closing costs include legal fees, land transfer fees, property taxes, and other costs that must be paid as part of the closing process on your home purchase. These can add up to 3-4% of the sale price of the home.

Mortgage default insurance is required when paying less than 20% down on a mortgage loan. This is required by law, and not under the control of the individual lender.

Mortgage default insurance protects the lender in the event of a default by paying the remaining debt. It reduces the risk to lenders, allowing them to offer home mortgages to more people at a lower interest rate than would be possible if the risks were higher.

The cost of mortgage default insurance is between 2.80 and 4.00% of the price of the home. However, unlike most closing costs, mortgage default insurance is built into the mortgage and financed over the life of the loan. It increases the total cost of the home and the size of the monthly payments but does not require a lump sum of cash at closing time.