Understanding different mortgage types

There are many different kinds of mortgages out there. When thinking about what would be the best fit, you may ask yourself:

• Should I choose a fixed or variable rate?
• Isn’t it best to secure the lowest interest rate possible?
• What happens if I move or experience a big life change?
• How long should I lock in my mortgage for?

Let’s start with interest rates.

Fixed vs. variable interest rates

When renewing, you can choose a fixed- or variable-rate mortgage.

With a fixed rate, your interest rate and payments won't change during the term of the mortgage. Because your rate is guaranteed, it’s usually higher than a variable rate over the same period. If rates are expected to rise, or if you’re on a strict budget, you may want to lock in the fixed rate. 

With a variable rate, the interest rate changes based on your bank's mortgage prime rate. When rates drop, more of your payment goes towards the principal (the original amount you borrowed). And when rates rise, more will go towards interest. 

Rate changes may affect you differently depending on your specific variable-rate mortgage. Some allow payments to fluctuate as rates change, helping you maintain your amortization. However, not everyone’s budget can accommodate sudden payment increases.

With other variable-rate mortgages, your payment will stay the same regardless of rate changes. This means that if rates are getting lower, you can put more money towards your principal, effectively paying off your mortgage faster. Though if interest rates rise, you could end up owing interest at the end of your term. If this happened, you’d need to make a lump-sum "balloon" payment. 

So, when considering a fixed- vs. variable-rate mortgage, it’s important to consider how changing interest rates might affect you. This will help you make a decision that sets you up for success. 

Term vs. amortization

You’ll want to consider how your term length will work with your amortization.

Your mortgage term is the length of time your mortgage details (like interest rate and payment amount) stay in effect. Shorter terms occasionally offer lower rates, but then you’ll have to renew earlier when rates might be higher. The most common term is five years, but depending on your mortgage and bank, it can range from six months to ten years.

Amortization is the total time it will take to pay off your full mortgage (the borrowed amount plus interest). In Canada, the maximum amortization period is 25 years—unless you’re a first-time homebuyer or purchasing a new build. Then it can be extended to 30 years. 

Do you know how long you plan on staying in your home, or how rates are expected to change over the next few years? This knowledge can help you find your ideal term.

Closed vs. open mortgages

You’ll also have to choose between a closed or open mortgage. Let’s look at the pros and cons of each. 

With a closed mortgage, you’ll get a better rate for committing to specific details for the duration of the term. However, it will be difficult (and expensive) to pay off your mortgage early or switch lenders before the term’s over.

With an open mortgage, your rate’s usually higher but you can make extra payments, pay off your mortgage entirely, or switch lenders at any time. 

When trying to decide between the two, it can help to consider whether you can commit to a mortgage contract for a full term. Because if you can, you’ll end up saving more on interest without having to compromise. 

Other important mortgage features

Not all mortgages are built the same. These features can offer you greater flexibility and may impact how you want to renew.

Want to pay off your mortgage sooner than originally planned? 

You can do this through prepayments or by putting lump sum amounts towards your principal. If you’re able, you can also make allowable increases to your payment amounts and adjust whether they are made monthly, bi-weekly or semi-monthly. 

Not sure about your next move? You have options. 

Portability allows you to transfer the existing mortgage on your current property to a new mortgage when you sell your home and buy a new one.

Blend and extend lets you make changes to your current mortgage before the term ends without paying the penalties that come from breaking your mortgage. These changes often “blend” your current mortgage terms with new ones (like a new interest rate based on current market conditions) and “extend” your term length. 

Refinancing essentially means replacing your mortgage with a new one. This is a great way to access the equity you’ve built in your home, for example to consolidate debt and reduce interest costs. While many people choose to refinance when their mortgage approaches the end of term, you can do it at any time.

Need a break from your payments, or want to renew early?

Payment deferrals let you temporarily pause your principal and interest payments. While interest will continue to accrue during this period, deferrals can provide relief when you need to take a break on payments. If you have life or disability insurance on your mortgage, those premiums will still be debited from your account to maintain your coverage. Payment deferrals are typically available on both primary and secondary homes. 

Early renewals are when you sign a new mortgage term with your bank before your current term has ended. At ATB, you can renew as early as 120 days in advance.

Mortgage renewal scenarios

Mortgage renewals look different to everyone. Here are some real-life scenarios to consider while you think things through.

Scenario one: retiree Latisha purchases her dream condo

Four years ago, Latisha purchased a two-bedroom condo and has no plans to move in the foreseeable future. Last year, she retired from her job as a teacher. She now earns a pension and is watching her expenses. Her mortgage is coming up for renewal, and she wants to live within her means and avoid any surprises.

In this scenario, Latisha would likely consider a closed, fixed-term mortgage. The fixed interest rate will give her predictable mortgage payments, and since she’s not planning to pay down her mortgage sooner or sell, a closed mortgage could offer her a lower interest rate.

Scenario two: Jessica and Carlos are growing their family and building a new house

Jessica and Carlos have been married for seven years and are expecting their second child. The small home they bought five years ago won’t fit their growing family, so they’ve decided to build a larger house. Now, their original mortgage has come up for renewal, but their new house is still two months away from completion.

Jessica and Carlos may opt for an open mortgage renewal, at either a fixed or variable rate for the two months until their new house is complete. That way, when they sell their current home and pay off the mortgage, there won’t be a prepayment penalty.

Ready to renew? We can help.

Assessing your current situation and future goals will help you decide the terms of your mortgage renewal. And remember, there’s always room for flexibility as life changes. Our experts at ATB can give you advice and help you find a renewal that works for you.