Mortgage Types Explained
Fixed or variable? Open or closed? Here's what each mortgage type means — and how to pick the right one for you.
Fixed Rate vs Variable Rate
This is the biggest decision you'll make when choosing a mortgage.
🔒 Fixed Rate
Your interest rate stays the same for the entire term (usually 5 years).
Best for:
- People who want predictable payments
- First-time buyers who want stability
- When rates are expected to rise
Pros: Predictable, easy to budget, peace of mind
Cons: Usually higher starting rate, expensive to break early
📊 Variable Rate
Your rate fluctuates with the Bank of Canada's prime rate.
Best for:
- People comfortable with some risk
- When rates are expected to drop
- Those who may sell or refinance early
Pros: Historically saves money, cheaper to break (3 months' interest)
Cons: Payments can increase, less predictable
💡 Historical Fact
Studies show that variable rates have saved borrowers money about 80-90% of the time over the past several decades. But past performance doesn't guarantee future results — especially in volatile rate environments.
Open vs Closed Mortgages
| Feature | Open Mortgage | Closed Mortgage |
|---|---|---|
| Prepayment | Pay off anytime, no penalty | Limited prepayment (10-20%/year) |
| Interest Rate | Higher | Lower |
| Penalty to Break | None | IRD or 3 months' interest |
| Best For | Selling soon, expecting lump sum | Most homeowners (95%+ choose this) |
Conventional vs High-Ratio
Conventional Mortgage
Down payment of 20% or more
- No mortgage insurance (CMHC) required
- Lower monthly costs
- More equity from day one
High-Ratio Mortgage
Down payment of less than 20%
- Must pay mortgage insurance (CMHC/Sagen/Canada Guaranty)
- Insurance = 2.8% to 4% of mortgage amount
- Added to mortgage or paid upfront
- Often gets slightly lower interest rates
CMHC Insurance Premiums
| Down Payment | Insurance Premium | On $500K Mortgage |
|---|---|---|
| 5% – 9.99% | 4.00% | $20,000 |
| 10% – 14.99% | 3.10% | $15,500 |
| 15% – 19.99% | 2.80% | $14,000 |
| 20%+ | None | $0 |
Mortgage Terms vs Amortization
People often confuse these two:
Term: The length of your mortgage contract (usually 1-5 years). When it ends, you renew or switch lenders.
Amortization: The total time to pay off the mortgage (usually 25 years, up to 30 for insured first-time buyers).
Think of it this way: your amortization is the marathon, your term is one leg of the race.
Which Mortgage Type Should You Choose?
Here's a quick decision guide:
- 🏠 First-time buyer wanting stability? → 5-year fixed, closed
- 📉 Rates are high and expected to drop? → Variable rate
- 💰 Planning to sell within 1-2 years? → Open mortgage or short-term fixed
- 🎯 Want the lowest rate possible? → Variable rate, closed
- 😴 Want to set it and forget it? → Fixed rate, closed