Mortgages


We are told the word “Mortgage” comes from a French word meaning death contract. This does not imply it will kill you; but rather, the contract ends when the obligation to repay the loan has been fulfilled. In essence it is any loan that is secured against real estate. The borrower’s obligation is to repay the loan upon the terms set out in the loan agreement, also to keep the taxes paid, insure the property and take care of the property so that it is not devalued. If the borrower does not fulfil its obligations the lender may seize the property by way of foreclosure proceedings or sell the property by way of power of sale proceedings. The latter being the most commonly used method of enforcing the mortgage. If the lender sells the property and does not recover the total amount of money that is owed to the lender, plus the costs of dealing with the property the borrower will remain liable to the lender to repay the lender’s loss.

WORDS AND PHRASES YOU SHOULD KNOW

(As taken from the CMHC Web site which is an excellent resource for homebuyers)

Adjustable or Variable Mortgage Interest Rate

With an adjustable rate, both the interest rate and the mortgage payment vary, based on market conditions.

Amortization

Length of time over which the debt will be repaid.

Appraisal

Process for estimating the market value of a property.

Appraiser

Certified professional who carries out an appraisal.

Approved Lender

A lending institution authorized by the Government of Canada through CMHC to make loans under the terms of the National Housing Act. Only Approved Lenders can negotiate CMHC insured mortgages.

Blended Payment

A mortgage payment that includes principal and interest. It is paid regularly during the term of the mortgage. The payment total remains the same, although the principal portion increases over time and the interest portion decreases.

Closed mortgage

A closed mortgage cannot be paid off, in whole or in part, before the end of its term. Many closed mortgages limit prepayment options such as increasing your mortgage payment or lump sum prepayment (usually up to 20% of your original principal amount).

CMHC Insurance Premiums

The CMHC Mortgage Loan Insurance premium is calculated as a percentage of the loan and is based on the size of your down payment. The higher the percentage of the total house price/value that you borrow, the higher percentage you will pay in insurance premiums.

Commitment Letter (or Mortgage Approval)

Written notification from the mortgage lender to the borrower that approves the advancement of a specified amount of mortgage funds under specified conditions.

Conventional Mortgage

A mortgage loan up to a maximum of 80% of the lending value of the property. Typically, the lending value is the lesser of the purchase price and market value of the property. Mortgage insurance is usually not required for this type of mortgage.

Credit history or Credit Report

The main report a lender uses to determine your creditworthiness. It includes information about your ability to handle your debt obligations and your current outstanding obligations.

Default On Payment

Failure to make a mortgage payment.

High-Ratio Mortgage

A mortgage loan higher than 80% of the lending value of the property. This type of mortgage may have to be insured — by CMHC, for example — against payment default.

Lump Sum Prepayment

An extra payment, made in lump sum, to reduce the principal balance of your mortgage, with or without penalty. A closed mortgage typically restricts the amount and frequency of the prepayments you can make. With an open mortgage, however, you can make a lump sum prepayment at any time without penalty. Making prepayments can help you pay off your mortgage sooner and ultimately save on interest costs over the life of your mortgage.

Maturity Date

The last day of the term of the mortgage. On this day, the mortgage loan must either be paid in full or the agreement renewed.

Mortgage Approval

Written notification from the mortgage lender to the borrower that approves the advancement of a specified amount of mortgage funds under specified conditions.

Mortgage Loan Lnsurance

If you have a high-ratio mortgage (more than 80% of the lending value of the property) your lender will probably require mortgage loan insurance, which is available from CMHC or a private company.

Mortgage term:

Length of time that the agreed-upon mortgage contract conditions, including interest rate, is fixed.

Open Mortgage

A flexible mortgage that allows you to pay part before the end of its term.

Principal

The amount that you borrow for a loan. Each monthly mortgage payment consists of a portion of the principal that must be repaid plus the interest that the lender is charging you on the outstanding loan balance. During the early years of your mortgage, the interest portion is usually larger than the principal portion.

Term

Mortgage term is the length of time that the mortgage contract conditions, including interest rate, are fixed.

HOW DO YOU GO ABOUT SECURING A MORTGAGE?

You can apply directly to your own bank or other banks or lenders. You can also retain the services of a mortgage broker to assist you in securing a mortgage. You or your broker should shop around as mortgage lending rates are quite competitive and shopping may enable you to secure lower rates. The rate you secure will often be less than the rates posted by the banks.

A mortgage broker can save you time and assist in assembling the material to support your application. He or she can save you the trouble of visiting several banks and do the shopping for you. Sometimes he or she can get better rates based on the volume of business done by the broker. If you are a qualified borrower his or her fee will likely be paid by the lender so there will be no additional cost to you. If your situation is difficult because of being self-employed or having past credit problems the broker may be the only one who can find a lender for you, In this case however, you will likely be charged a fee by the broker.

Once you have settled on a lender and the kind of mortgage that best suits your needs you should obtain a preapproval. DO NOT however treat a preapproval as a sure thing. It simply means the bank has accepted the fact that you are qualified for a mortgage of a certain amount; it does NOT mean your specific purchase has been approved. The lender will have to conduct an appraisal of the property; so make your offer conditional upon obtaining financing and do not waive the condition until the lender has advised you the property has been appraised and meets their standards. You should obtain a written commitment from your lender before waiving your condition.

For more details on this and other related information please review CMHC’s site by clicking here.

HOW MUCH CAN YOU BORROW?

 The amount will be determined by your lender based upon your gross monthly income, your gross debt service ratio (which consists of the total cost of your mortgage payments, taxes, heat, hydro and water along with condominium fees if applicable) and your total debt load which consists of the above items plus any other debts you may have.

HOW MUCH SHOULD YOU BORROW?

 This is a question that each person must determine based on their personal values.. The lenders will set the upper limit but just because you have been approved for a certain amount doesn’t mean you have to borrow the entire sum. Use some measure of caution and give yourself some breathing room. Don’t become house poor. Consider future events such as job loss and child birth and the effect they will have on your ability to pay.

DOWN PAYMENT

This refers to the amount of cash you have to apply to the purchase of your home. Banks cannot lend you money unless you have at least 5% of your purchase price. If your down payment is less than 20% of the purchase price you will also have to purchase mortgage insurance from CMHC or another insurer. Usually this is arranged by your lender. This insurance protects the lender and not you. If you default on your mortgage and the lender suffers a loss, the insurer will pay the lender its loss but will in turn make every effort to collect the amount of the loss from you. The insurance premium and provincial sales tax on that premium do not have to be paid by you at the time of the closing. The amount can be added on to the mortgage amount you have arranged and of course you will be charged interest on this premium and sales tax as it becomes an addition to your mortgage debt.

OTHER MATTERS YOU SHOULD CONSIDER

Fixed vs. Variable Rate

The two most common options for mortgages are fixed rate and variable rate. With a fixed rate mortgage the interest rate you select will remain the same throughout the term of the mortgage. It provides you with some measure of certainty if that is what you are after. With the variable rate the interest you pay will increase or decrease based upon the lender’s prime rate. For the last number of years this option has resulted in the best deal for borrower, however there is a risk that the interest will increase. Generally you will be granted a privilege to lock in your rate or convert the mortgage to a fixed rate but you will have to remain very vigilant as to what is happening with rates.

Short term vs. Long term

You can select from a number of options offered by lenders. From open which means you can pay it off at any time without being charged a penalty. Normally this privilege means you will be charged a higher rate of interest. A long term mortgage cannot be paid off until the end of the term. Generally lenders will grant limited prepayment privileges such as; up to 10% of the original amount once each year and/or increasing your normal payment by up to 10%. Apart from such privileges if you need to pay off you mortgage prior to the end of the term you will be charged a penalty. Inquire and determine your lender’s policy in these matters. Some lenders will let you port or transfer your mortgage to a new home you purchase before the end of the term of your mortgage but there are conditions to be met before you will be permitted to do so.

HOW LONG WILL YOUR LENDER HOLD THE MORTGAGE INTEREST RATE YOU HAVE BEEN APPROVED FOR?

This will vary amongst lenders but generally no longer than 60 to 90 days. Be certain it will be a long enough period of time to include your closing date or you could be faces with increased mortgage rates. This can be a significant issue if you are buying a new home or condominium. Generally the closing date will be a year or more in the future. If the builder is working with a specific lender they may have a program that will guaranty your rate for 18 months or some longer period designed to match your closing date.

ONE PIECE OF ADVICE

People will seldom have extra money to pay down on their mortgage at years end, however, if it is possible at all, select your mortgage payments as being bi-weekly accelerated payments. The result is that you will be paying one half of your usual monthly payment every two weeks. Over the course of a year you will end up paying one full extra month’s payment spread out over 26 equal payments. This additional amount comes off of the principal. The result is a savings to you of thousands of dollars in interest and years of mortgage payments.

FOR MORE INFORMATION AND FOR MORTGAGE CALCULATORS CHECK OUT THE BANK”S WEB SITES

Here are a few links to get you started:

http://www.rbcroyalbank.com/mortgages/

http://www.tdcanadatrust.com/products-services/banking/mortgages/mortgages-index.jsp

http://www.scotiabank.com/ca/en/0,,8,00.html

https://www.cibc.com/ca/mortgages/index.html

http://www.bmo.com/home/personal/banking/mortgages-loans/mortgage