The Canadian government has announced tightening of mortgage and financing rules beginning April 19^th. The government has though declined to consider reducing the current maximum amortization period of 35 years and the minimum down payment of five percent of the value of the house.

Here are some basic pointers to the different types of mortgages available in Canada.

Mortgages can be in general classified into two types;

• Fixed Rate Mortgage (FRM):

These are closed mortgages. Interest rate is fixed for specific term (for example, five years) and you cannot end it beforehand without paying a penalty.

Advantage: you will know the amount of interest and principal you would be paying for the term.  Even if the interest rate rises you mortgage interest rate will remain same until end of the term.

Disadvantage: If the interest rate goes down, as it has been over the past few quarters, you will not benefit as your interest rate is locked for a fixed term.

• Variable Rate Mortgage (VRM):

Here, the interest rate is pegged to prime rate. If prime rate changes your mortgage interest rate will change accordingly. Your payment amount remains same but interest component of the payment will change.

VRM can be further divided into two sub-categories.

Closed VRM:

Interest rate is variable for the term. But you cannot collapse before the end of term unless you pay penalty.

Advantage: If interest rate drops your mortgage amount will drop too. The interest portion of your payment will be less and you will pay more towards principal.

Disadvantage: If the interest rate goes up your mortgage amount will also go up and you cannot collapse the mortgage. If this happens interest rate of your payment will be more and you will be paying less towards principal.

Open VRM:

Interest rate is variable and it is not locked for the term. You can pay off the mortgage any time.

Advantage: If interest rate drops your mortgage rate will also drop. The interest portion of your payment will be less and you will pay more towards principal. If you feel the interest rate is going to rise, or if the interest rate has gone up, then you can convert it to a fixed closed mortgage without any penalty.

Disadvantage: Interest rate for these types of mortgages is usually higher than other two.