Mortgage Types

What are the main mortgage types in Ontario?

Ontario residential mortgages fall into several overlapping categories. A mortgage is described by interest rate type (fixed or variable), term flexibility (open or closed), insurance status (conventional or high-ratio), and product structure (standard, HELOC, reverse, etc.). A typical mortgage carries a label from each category — e.g., a "5-year closed fixed-rate insured mortgage."

Fixed-rate vs variable-rate mortgages

The most common distinction. Both types exist as 1-year, 2-year, 3-year, 4-year, 5-year, 7-year, and 10-year terms (the period during which the contract is in force). At the end of the term, the borrower renews or refinances.

Fixed rate: the interest rate is locked for the term. Predictable payments. Higher rate than equivalent variable.

Variable rate: the rate floats with the lender's prime rate. Most variable mortgages have a fixed payment (the dollar amount stays the same) with a floating amortization (the principal/interest split changes as prime moves). Some variable products use floating payments instead.

The exam tests when a variable rate would be the right recommendation. Generally: borrowers with stable income, ability to absorb rate increases, and a longer time horizon benefit from variable; risk-averse borrowers and those with tight cashflow benefit from fixed.

Open vs closed mortgages

Closed: the standard. Locked-in for the term. Prepayment is restricted, usually to 15-20% of original principal per year, plus the option to lump-sum on the anniversary date. Breaking a closed mortgage triggers a prepayment penalty — typically the greater of 3 months' interest or the interest rate differential (IRD).

Open: can be paid off at any time without penalty. Only used in specific situations (selling soon, expecting a windfall). Open mortgages carry a substantially higher interest rate to compensate the lender for the lack of term commitment.

Conventional vs high-ratio mortgages

The dividing line is the 20% down payment threshold.

Mortgage default insurance protects the lender against borrower default. The borrower pays the insurance premium (typically 2.8-4% of mortgage amount) which can be added to the principal. Insured mortgages get lower interest rates because the lender bears no default risk.

Specialized mortgage products

HELOC (Home Equity Line of Credit): revolving credit secured against home equity. Interest-only minimum payments. Variable rate at prime + a margin. Maximum 65% of property value (with combined HELOC + first mortgage capped at 80%). Useful for ongoing access to capital; risky if used to finance a lifestyle.

Reverse mortgage: for owners 55+. Borrower receives a lump sum or income stream against home equity, repays nothing during occupancy, and the loan is settled when the home is sold or the borrower dies. Interest accrues. The most expensive form of home equity borrowing — appropriate only for specific elder-care scenarios.

Second mortgage: a second loan registered against the same property, junior to the first mortgage. Higher rate than the first because the lender is repaid second in a default scenario. Often used by private lenders for borrowers who can't qualify for traditional refinancing.

Bridge loan: short-term financing to bridge the gap between buying a new home and selling the old one. Typically 60-90 days, interest-only, often arranged through the same lender as the new mortgage.

Where this appears in your Humber program

Mortgage types are tested heavily in Course 3: Additional Residential Properties in the financing and qualification modules. Reverse mortgages and HELOCs appear in Course 4: Commercial Real Estate and continuing-education courses on senior-client work.

A scenario the exam likes to test

A buyer is considering a 5-year fixed-rate insured mortgage at 5.49% versus a 5-year variable-rate at prime minus 0.50% (currently 5.20% net). The contract amount is $500,000 amortized over 25 years. The exam might ask: - Which has a lower monthly payment today? Variable (lower rate today). - What's the risk of variable? Rate increases during the term raise the interest portion (and on some products, the payment itself). - Stress test impact? Both products are qualified at the higher of contract+2% or 5.25%, so the qualifying rate is 7.49% (fixed) vs 7.25% (variable on this product) — close but not identical, which can affect maximum loan size.

Frequently asked questions

What is the difference between a fixed and variable mortgage in Canada?

A fixed-rate mortgage locks the interest rate for the term (usually 1 to 5 years), giving predictable payments. A variable-rate mortgage has an interest rate that floats with the lender's prime rate, so the rate (and on some products the payment) changes as the Bank of Canada moves rates. Variable rates are usually lower at origination but carry interest-rate risk.

What is the minimum down payment for a mortgage in Ontario?

For a property under $500,000, the minimum is 5% down. For properties between $500,000 and $999,999, the minimum is 5% on the first $500,000 plus 10% on the portion above. For properties $1 million or more, the minimum is 20% down (and the mortgage cannot be insured by CMHC, Sagen, or Canada Guaranty). All down payments below 20% require mortgage default insurance.

What is the IRD penalty for breaking a fixed mortgage?

The Interest Rate Differential (IRD) is calculated as the difference between the contracted rate and the lender's current rate for a term equal to the remaining months on the contract, multiplied by the outstanding principal and the remaining months. The penalty is the greater of 3 months' interest or the IRD. IRD penalties on big-bank fixed mortgages can be punitive when rates have fallen since signing — sometimes tens of thousands of dollars on a typical Ontario mortgage.

Can you have both a HELOC and a regular mortgage on the same property?

Yes — and this is the most common HELOC structure. Lenders offer collateral charge mortgages that combine a traditional amortizing mortgage with a HELOC component, both secured by a single registered charge on title. The combined exposure cannot exceed 80% of the property's value (with the HELOC portion capped at 65%).

Practice this topic

ExamAce covers mortgage types and qualification in Course 3 practice questions with scenarios on product selection, prepayment penalties, and stress-test outcomes. For the broader finance picture, see the real estate finance pillar guide.