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Common Mortgage Types and Terms Explained

When considering a mortgage, it’s helpful to understand the basic structures and terminology used by lenders in Canada. Below is a factual overview of common mortgage types and features.

Fixed Rate Mortgage

A fixed rate mortgage has an interest rate that remains the same for the entire term of the mortgage.

Key characteristics:

  • The interest rate is locked in for the duration of the term

  • Mortgage payments remain the same throughout the term

  • Mortgage terms can range from six months up to ten years

  • Fixed rate mortgages are widely available across Canadian lenders

  • Interest rates for fixed mortgages are influenced by Canadian bond yields

Variable Rate Mortgage

A variable rate mortgage is based on a lender’s prime rate, which is influenced by the Bank of Canada.

Key characteristics:

  • The interest rate can change during the mortgage term as prime changes

  • In many variable rate mortgages, the payment amount remains the same

  • Changes in prime affect how much of each payment goes toward interest versus principal

Adjustable Rate Mortgage

An adjustable rate mortgage is also based on a lender’s prime rate.

Key characteristics:

  • The interest rate changes when prime changes

  • Mortgage payments increase or decrease when prime changes

  • The payment structure adjusts in direct response to rate movement

Closed Mortgage

A closed mortgage has restrictions on repayment during the mortgage term.

Key characteristics:

  • Paying out the mortgage in full before the end of the term typically results in a penalty

  • Closed mortgages are commonly offered by Canadian lenders

  • Interest rates on closed mortgages are generally lower than on open mortgages

  • Closed mortgages can be combined with fixed, variable, or adjustable interest rates

  • Most closed mortgages allow limited prepayments, subject to lender terms

Open Mortgage

An open mortgage allows repayment flexibility during the term.

Key characteristics:

  • The mortgage can be paid off in part or in full at any time without penalty

  • Interest rates are typically higher than those of closed mortgages

  • Many lenders allow open mortgages to be converted to closed mortgages, subject to lender policies

  • Open mortgages can be combined with fixed, variable, or adjustable interest rates

Summary

Mortgage products vary by lender, and features may differ based on specific terms and conditions. Understanding the basic definitions and structures above provides a foundation for reviewing mortgage options and terminology.