One of the most confusing parts of getting a mortgage in Montreal and buying your own home can be the interest rates. From the myriad of choices available to how the interest is actually worked our, it can quickly become confusing if you’re not sure what it all means. However, understanding what each type of interest means can help you make the right decision when it comes to choosing the mortgage you want to go with.

Variable Rate

This is one of the most common mortgages in Montreal and probably the one that people relate to the most. It simply means that your monthly payments will be dictated by whatever the current interest rates are – so, if the housing market is good, you’ll probably see your monthly payments rise, whereas if the market’s in a slump, your interest rates and payments will be lower.

Tracker Rate ( just for UK )

Similar to a variable mortgage but with one big difference – the interest rate is tied directly to the Bank of England, so whatever decisions are made there, you’ll find your interest rate is slightly above or slightly below, dependent on current rates.

Fixed Rate

The other most popular type of mortgage, since this keeps your interest rate fixed for a set period of time (usually between 2-5 years). This ensures that you know exactly what you’re paying month in and month out. Of course, the downside to this type of mortgage is that if bank rates fall, you won’t benefit from the lower mortgage payments that people on variable rates will enjoy. You’re also usually penalised if you decide to switch lenders throughout your mortgage term, often as much as 3-4 months worth of interest.

Capped Mortgage ( mostly UK )

Often seen as a mix of variable and fixed rate, a capped mortgage means that your interest rate will only go so high for a set amount of time. So, if your cap is 10% and the housing market crashes through to 10½% or more, you won’t pay the extra rates. However, there’s the added bonus that if the interest rates fall, you’ll make the savings that a variable rate mortgage would give you.

Discount Mortgage

Just as it suggests, this will offer you a discount on your variable interest rate for the first couple of years on your mortgage. However, although it helps reduce your early monthly payments, you still pay the same overall amount that you would if you take out a standard mortgage.

Cashback Mortgage

Excellent for the first time buyer especially, this offers you a cash rebate at the start of the mortgage, calculated as a percentage of your overall mortgage. You receive this cash instantly, and simply pay it back at the end of the mortgage. This is an ideal solution for anyone just starting out on the property ladder, or for anyone on a limited budget.

There are other types of mortgage as well as these ones, including current account mortgages and offset mortgages, which a specialist advisor would be able to discuss with you. Just knowing what’s available and whether it’s suitable for you or not can make a big difference in the long run.

A mortgage loan is a loan secured by real property through the use of a mortgage (a legal instrument). However, the word mortgage alone, in everyday usage, is most often used to mean mortgage loan. A home buyer or builder can obtain financing (a loan) either to purchase or secured against the property from a financial institution, such as a bank, either directly or indirectly through intermediaries.

Features of mortgage loans such as the size of the loan, maturity of the loan, interest rate, method of paying off the loan, and other characteristics can vary considerably.According to Anglo-American property law, a mortgage occurs when an owner (usually of a fee simple interest in realty) pledges his interest as security or collateral for a loan. Therefore, a mortgage is an encumbrance on property just as an easement would be, but because most mortgages occur as a condition for new loan money, the word mortgage has become the generic term for a loan secured by such real property.

As with other types of loans, mortgages have an interest rate and are scheduled to amortize over a set period of time; typically 25, 30 and in recent years 40 years. All types of real property can, and usually are, secured with a mortgage and bear an interest rate that is supposed to reflect the lender's risk.

Governments usually regulate many aspects of mortgage lending, either directly (through legal requirements, for example) or indirectly (through regulation of the participants or the financial markets, such as the banking industry), and often through state intervention (direct lending by the government, by state-owned banks, or sponsorship of various entities). Other aspects that define a specific mortgage market may be regional, historical, or driven by specific characteristics of the legal or financial system.

Mortgage loans are generally structured as long-term loans, the periodic payments for which are similar to an annuity and calculated according to the time value of money formula. The most basic arrangement would require a fixed monthly payment over a period of ten to thirty years, depending on local conditions. Over this period the principal component of the loan (the original loan) would be slowly paid down through amortization. In practice, many variants are possible and common worldwide and within each country.

There are many types of mortgages used worldwide, but several factors broadly define the characteristics of the mortgage. All of these may be subject to local regulation and legal requirements.
Interest: interest may be fixed for the life of the loan or variable, and change at certain pre-defined periods; the interest rate can also, of course, be higher or lower.Term: mortgage loans generally have a maximum term, that is, the number of years after which an amortizing loan will be repaid. Some mortgage loans may have no amortization, or require full repayment of any remaining balance at a certain date, or even negative amortization.Payment amount and frequency: the amount paid per period and the frequency of payments; in some cases, the amount paid per period may change or the borrower may have the option to increase or decrease the amount paid.

Prepayment: some types of mortgages may limit or restrict prepayment of all or a portion of the loan, or require payment of a penalty to the lender for prepayment.The two basic types of amortized loans are the fixed rate mortgage (FRM) and adjustable rate mortgage (ARM) (also known as a floating rate or variable rate mortgage). In many countries, floating rate mortgages are the norm and will simply be referred to as mortgages; in the United States, fixed rate mortgages are typically considered "standard." Combinations of fixed and floating rate are also common, whereby a mortgage loan will have a fixed rate for some period, and vary after the end of that period.

In a fixed rate mortgage, the interest rate, and hence periodic payment, remains fixed for the life (or term) of the loan. In the Canada the term is usually up to 40 years (25 and 30 being the most common), although longer terms may be offered in certain circumstances. For a fixed rate mortgage, payments for principal and interest should not change over the life of the loan, although ancillary costs (such as property taxes and insurance) can and do change.

In an adjustable rate mortgage, the interest rate is generally fixed for a period of time, after which it will periodically (for example, annually or monthly) adjust up or down to some market index.
Common indices in the Canada include the Prime Rate, the London Interbank Offered Rate (LIBOR), and the Treasury Index ("T-Bill"); other indices are in use but are less popular. Adjustable rates transfer part of the interest rate risk from the lender to the borrower, and thus are widely used where fixed rate funding is difficult to obtain or prohibitively expensive. Since the risk is transferred to the borrower, the initial interest rate may be from 0.5% to 2% lower than the average 30-year fixed rate; the size of the price differential will be related to debt market conditions, including the yield curve.