What is a conventional mortgage?
A conventional mortgage is when you purchase a home with a down payment of at least 20% of the purchase price or appraised value of the home.
If less than 20% of the purchase price is used for the down payment, then the mortgage is known as high ratio and must be mortgage insured by CMHC, Genworth or Canada Guarantee.
Benefits of a conventional mortgage:
- There is immediately equity in your property.
- Your mortgage doesn’t require mortgage insurance.
- The rate is generally a fixed rate term of 1 to 5 years, 7 or 10 years; the payment is set for that time which allows you stability for your economic future.
- Maximum amortization allowed is 30 years.
What is a Home Equity Line of Credit?
A Home Equity Line of Credit, known as a HELOC, is a loan in which the lender agrees to lend a maximum amount of money. HELOC can be used to pay for your children’s education, home improvements such as a new kitchen, consolidate debt or purchase a 2nd property.
The maximum loan amount that can be borrowed is 65% unless there is a fixed mortgage portion, then the maximum loan amount is 80% of the purchase price or appraised value.
Benefits of a HELOC:
- The HELOC is not advanced at once, but you can use it like a credit card – charge it and pay it off, however you can’t use more than the credit limit.
- Typically a HELOC is taken out over a 25 year term.
- Minimum required payments are interest only based on the outstanding balance.
- The interest rate is variable, but can be changed at any time at the banks discretion.
- The HELOC can be accessed via debit card, cheques or online.
Differences between conventional mortgage and HELOC:
- The balance on a conventional mortgage only goes down (unless you refinance to take out equity in your home).
- Other lenders will allow you to “transfer” or “switch” your mortgage to them at maturity at little or no cost to you.
- The lender can have you sign to have the mortgage registered for up to 125% of the real estate value.
- HELOC’s are known and registered as collateral mortgages
- Most lenders will not “transfer” or “switch” a collateral mortgage. If you wish to change lenders you’d have to discharge your mortgage and pay the fees to have a new mortgage registered.