Which type of mortgage is right for you?

High-ratio or conventional? Fixed or variable rate? Open or closed? They’re all questions you’ll have to answer as you evaluate your options and choose a mortgage to meet your needs. Whether you’re about to buy a new home or your mortgage is up for renewal, these simple explanations can help you make a more informed decision.

5-minute read 18 November, 2018

High-ratio vs. conventional mortgages

When you buy a new home, you need at least 5% of the property’s value for the down payment. Any extra money you put down is up to you. The type of mortgage you qualify for is based on the amount of your down payment:

A high-ratio mortgage means your down payment is less than 20% of the property’s value. With a high-ratio mortgage, you will have to buy mortgage insurance from the Canada Mortgage Housing Corporation (CMHC), Canada Guaranty or Sagen^TM to protect the lender against loss if you fail to make your mortgage payments.
A conventional mortgage means your down payment is 20% or more of the property’s value. With a conventional mortgage, you don’t need to buy mortgage insurance.

Your choice of high-ratio or conventional will depend on how much money you have for a down payment.

Fixed rate vs. variable rate mortgage

Mortgages may come with a fixed or variable interest rate:

A fixed interest rate will not change during your mortgage term, and your payments will stay the same too. You’ll always know how much your next payment will be and how long it will take to pay back your mortgage.
A variable interest rate will change when your lender’s prime rate changes. While your mortgage payment may not change, how your payment is allocated will change. If rates go down, more of your payment will go towards the loan principal so you’ll pay off the mortgage faster. If rates go up, more of your payment will go towards interest costs, which means it may take longer to pay off your mortgage.

Often, variable rates are lower than fixed rates, because you’re taking on some of the risk if rates change. If your budget is tight or you’re concerned that rates may rise in the near future, you may wish to choose a fixed rate mortgage. If you’ve got some flexibility in your budget, you may be better off with a variable rate mortgage.

Can’t decide? Not a problem. Both of Manulife Bank’s mortgage products allow you to divide your debt between fixed and variable rates.

Fixed rate vs. variable rate mortgage
Fixed rate	Variable rate
Pros You'll know exactly how long it will take to pay off your mortgage If interest rates go up, your rate will stay the same	Pros If interest rates go down, you'll pay off your mortgage faster because more of your payment will go towards your loan principal You can pay off the mortgage in full at any time, without penalty
Cons Prepayments are limited If interest rates go down, you won't receive the lower rate	Cons If interest rates go up, more of your payment will go towards interest, which means it will take you longer to pay off your mortgage; however, you may be able to switch to a fixed rate mortgage and lock in your rate

Open term vs. closed term mortgage

A mortgage term is the length of time you’re committed to an interest rate, a lender and any conditions set out by that lender. Mortgage terms vary in length – typically between 6 months and 10 years, with 5 years being the most popular term:

An open term mortgage allows you to pay back all the money you borrow at any time, without penalty. Because of this flexibility, open term mortgages generally have higher interest rates.
A closed term mortgage does not allow you to repay the entire mortgage balance early without penalty, but most closed term mortgages do offer prepayment options that let you pay down your mortgage sooner. Because closed term mortgages aren’t as flexible as open term mortgages, interest rates are usually lower.

Your choice of an open or closed term depends on a number of factors, including how much flexibility you need. If you’re expecting changes to your financial or housing situation in the near future, you may prefer an open term. If you’re pretty sure your situation won’t change for a few years, a closed term may be a good option. If you want maximum flexibility, including the ability to quickly pay down your debt or re-borrow payments you’ve already made, consider a home equity line of credit.

Manulife Bank’s mortgages allow you to combine the two options.

Open term vs. closed term mortgage
Open term mortgage	Closed term mortgage
Pros Flexibility to make prepayments or pay off the entire mortgage balance at any time, without penalty Potential to reduce interest costs over the life of your mortgage	Pros Interest rates are usually lower
Cons Interest rates are usually higher	Cons Prepayments are limited A penalty applies if you want to pay off the mortgage balance early

Mixing it up with an all-in-one account

An all-in-one banking and mortgage account combines all of your savings and debts into one efficient, flexible account.
By consolidating your debt at a competitive interest rate and using your savings and income to reduce debt faster, you could take years off your mortgage and save thousands in interest costs.

All-in-one banking and mortgage account
Pros	Cons
Save on interest costs by consolidating your debt Reduce your debt with your short-term savings and income Access your money at any time, up to your borrowing limit Customize your debt by dividing it into multiple portions with different rates and terms Easily manage your money by combining your savings and loans into a single account	Need to be disciplined with spending to maximize the benefits

Adding flexibility with a collateral mortgage charge

All mortgages are secured by real property (such as your house), and that security is recorded in the appropriate provincial or territorial registry office. Some jurisdictions refer to this as the registration of an encumbrance or "charge" (or “hypothec” in Quebec). Two types of charges may be registered:

A conventional mortgage charge, commonly known as a standard charge, registers the exact amount of your mortgage against the ownership title on your home. It includes your mortgage conditions, such as the loan amount and interest rate, and details about your property. If you increase your mortgage amount, the security must be registered again and you'll likely have to pay a fee.
A collateral mortgage charge registers the amount of your mortgage or a higher amount. When you register a higher amount, you may be able to increase your mortgage amount with the current security and without any additional fees. A mortgage increase always requires approval from your lender.

Learn more about conventional and collateral mortgage charges on the Canadian Bankers Association website.

Comparing the features of a traditional mortgage vs. all-in-one banking and mortgage account

Traditional mortgage vs. All-in-one banking and mortgage account
	Traditional mortgage	All-in-one banking and mortgage account
Access to credit limit	Full amount paid in a one-time lump sum One term with a fixed or variable interest rate	Access money at different times when you need it Line of credit with the option to create sub-accounts
Principal repayment	Must start making principal and interest payments immediately Cannot re-borrow money as the balance is paid off	Pay down your principal on your own terms Option to make interest-only payments Re-borrow your principal as you need it
Prepayment privileges (closed term and fixed rate)	Option to increase the amount of your regular payments (up to 25% per year) or make an annual lump sum prepayment (up to 20% of your original mortgage amount per year)	Repay your line of credit balance at any time, without penalty
All-in-one banking and mortgage account privileges	Not available	Combined mortgage, savings and chequing account

"Now that you’re armed with some simple facts, see how Manulife One or Manulife Bank Select can best meet your needs"