In simple terms, a mortgage is a promise you give to a lender, which he uses to grant funds sufficient enough to purchase a property. The property itself is used as security to insure repayment. Title or deed to the property is held by the lender for the life of the mortgage loan. Mortgages allow you to pay back the principal, or amount borrowed, plus interest in regular installments. Often, the taxes on your property are also added to the mortgage payments.
Types of Mortgages
- Conventional Mortgage
With a conventional mortgage the purchaser has to have saved at least 25% of the purchase price as a down payment. You are allowed to borrow up to 75% of the purchase price or the appraised value of the property, whichever is less. Whenever a mortgage exceeds 75% of the value of the property it must be insured, thus becoming a high-ratio mortgage.
- Insured or High-Ratio Mortgage
With a high-ratio mortgage the purchaser has less than a 25% down payment. These mortgages are often referred to as NHA mortgages because they are granted under the provisions of the National Housing Act. You can borrow up to 95% of either the purchase price or the appraised value of the property (whichever is less) but are required by law to insure the mortgage and pay a one-time insurance premium based on the total value of the mortgage. For insurance you can either use the Canada Mortgage and Housing Corporation (CMHC) or a government approved private insurer. Mortgage loan insurance premiums range from 1.25% to 3.75%, depending upon the size of the down payment.
Amortization of a Mortgage
The amortization of a mortgage refers to the total number of years required to pay back the entire amount borrowed. The most common amortization period is 25 years; you can accelerate it in order to save on interest charges as long as you are comfortable with the larger payments.
Term of a Mortgage
The term of a mortgage refers to the number of months or years that the lender and borrower commit to one another at the quoted interest rate and agreed-upon mortgage features. It differs from the amortization period in that mortgage terms usually range from 6 months to 5 years, while it may require a 25-year amortization period to pay back the entire borrowed amount. Each time a term is up, you must either renew for another term with your current lender at the new rates or find a different lender.
Lenders constantly add additional features and incentives to their mortgage products to attract business in what is a highly competitive market. You should look for the mortgage that best suits both your cash flow and your personal long-term goals. There are many types of mortgage payment structures available, offering both flexible monthly payments and pre-payment options that can save you significant amounts of money over the long term. It is definitely worth looking into your options before signing up. Most mortgages are very similar to one another and have these common features:
You can sell your home and move the mortgage to another property without breaking it and having to pay a penalty. This feature is very attractive if your mortgage has a good interest rate and you want to take it with you to your new home.
The new purchaser can take over your mortgage and assume the payments. Usually the lender’s approval is required before this is allowed.
- Pre-payment privileges:
Such as up to 10% extra payment against the principle on the yearly anniversary date or monthly double-up payments. All prepayments are deducted from the principal amount owing and do not go toward accrued interest.
- Open versus Closed Mortgage:
Despite their limited prepayment privileges (10-15% a year), most mortgages are ‘closed’, meaning that they can not be paid off until the end of the term without a stiff penalty. Fully ‘open’ mortgages can be paid off at any time, penalty-free, but they usually bear a higher interest rate.
- Automatic renewal privileges:
You don’t need to re-qualify financially when the mortgage term is up in order to renew the mortgage. This could be very important if your financial situation changed or if your debt load increased and you don’t re-qualify under current rules.
- Payment Periods:
By switching your payment schedule from monthly to weekly or biweekly you are able to shorten the mortgage amortization period and save a substantial amount on interest payments.
What can I afford?
One of the first questions we ask ourselves is how much of a mortgage can we afford? To help you calculate what you can afford, here are a few links:
Important Mortgage Questions to Ask
The interest rate is usually the first feature of a mortgage that people consider, but there are many other features that should be looked into. In order to make sure you are getting a mortgage that meets your needs, click here for a list of questions you may want to ask your mortgage lender.
What information does a financial institution require?
Listed below are the items any financial institution will require in order for you to obtain mortgage financing:
Applicant(s) to provide:
- Social Insurance Number
- Date of Birth
- Details on any loans or debts (name of institution; car loans, credit cards, etc.)
- Verification of down payment (copies of bank balance, GIC, RRSP, etc.)
- Verification of employment (letter from employer identifying position, gross income and years of service; if self-employed, 3 years financial statements and tax returns)
- Gift letter (if applicable)
- Application/Appraisal fee(s)
- Proof of fire insurance (lawyer will verify on closing)
Real Estate Sales Representative to provide:
- Copy of Agreement of Purchase and Sale
- Copy of property listing (floor plan if purchasing a new home)
- Copy of the survey
- Copy of well and septic certificates (if rural property)