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Mortgage Information - Mortgages Explained
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Basically, a mortgage is just a loan that is to be used to finance the purchase of property.
The property itself is used as security to ensure repayment and the lender holds the title or
deed to the property either directly or indirectly (depending on your jurisdiction and type
of lender) until you have repaid the entire amount plus interest.
When shopping for a mortgage you should keep in mind that there are many different types
available. They can range from fixed rate mortgages where the interest rates never change,
to variable rate mortgages where interest rates are pegged to the Bank of Canada rate,
allowing them to rise or fall over time as the economy changes. Between these two extremes
are a variety of other products that attempt to blend the advantages of the guaranteed interest
rates of fixed rate mortgages with the interest rate flexibility found in variable rate mortgages.
The length, or "term" of a mortgage, is also an important factor to consider. You can choose between
short-term mortgages that need to be renegotiated every year and long-term mortgages where you lock
your loan in for up to 25 years.
One of the most important things you need to do before committing to any type of mortgage
is to sit down with a mortgage professional and examine the advantages and disadvantages of
all available options and determine which product is best suited to your current situation
and future plans.
There are Three Basic Mortgage Formats:
- 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. The general rule of thumb for
high-ratio mortgage premiums is...
- If the mortgage is 75% to 80% of the purchase price: 1.25% premium due on the mortgage value.
- If the mortgage is 80% to 85% of the purchase price: 2.00% premium due on the mortgage value.
- If the mortgage is 85% to 90% of the purchase price: 2.50% premium due on the mortgage value.
- If the mortgage is 90% to 95% of the purchase price: 3.75% premium due on the mortgage value.
This insurance premium may be either paid up front or added to the
mortgage. If added to the mortgage, a $150,000 mortgage with a 5% down
payment would translate into a $155,625 mortgage ($150,000 mortgage +
3.75% insurance premium). The extra insurance premium increases the
mortgage payment by about $35 per month at a 7% interest rate.
This insurance premium may be either paid up front or added to the
mortgage. If added to the mortgage, a $150,000 mortgage with a 5% down
payment would translate into a $155,625 mortgage ($150,000 mortgage +
3.75% insurance premium). The extra insurance premium increases the
mortgage payment by about $35 per month at a 7% interest rate.
There are additional criteria to be considered when applying for a
high-ratio mortgage such as minimum loan terms allowed, maximum
amortization periods, allowable purchasers' debt levels, source of the
down-payment if less than 10%, use of the property (single
family/duplex/investment), plus many more. There is even a maximum
purchase price allowed with a 5% down payment. It can range from
$125,000 to $250,000 and depends on which Canadian City you are
purchasing in. Feel free to ask your REALTOR or mortgage lender for a
more in-depth explanation, or visit the large and detailed Canada
Mortgage and Housing Corporation site.
There is a 3rd type of mortgage: a Pre-Approved mortgage.
A pre-approved mortgage is not actually a mortgage at all. It is the
preliminary approval by the lender of the borrower's application for a
mortgage. It usually sets out the maximum mortgage amount allowed, with
an interest rate guarantee for 30 to 60 days. This approval is subject
to a satisfactory appraisal of the subject property and a credit review
of the buyer so it is highly advisable to make any offer to purchase
conditional upon financing.
Mortgage Features
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 common features such as...
- They are portable:
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.
- They are assumable:
The new purchaser can take over your mortgage and assume the payments.
Usually the lender's approval is required before this is allowed.
- They have 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.
- 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.
- Automatic renewal privileges:
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.
Amortization of a mortgage:
The amortization of a mortgage
refers to the total number of years required to pay back the entire
amount borrowed. While the most common (and maximum) amortization
period is 25 years, you can accelerate it to a shorter period of time
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.
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Mortgage Information
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