The 411 on Mortgages

WHAT IS A MORTGAGE?

 A mortgage is a loan that allows individuals to buy a property without paying the total price all at once. 

When negotiating the amount of your mortgage loan, you will most likely be required to provide a down payment. The down payment will go towards the total purchase amount.

The mortgage loan amount is determined by the home's purchase price minus your down payment. The borrower must repay a mortgage loan with interest. There are different types of payment methods that make up the different kinds of mortgages available.

The monthly payments are divided into two parts. One part goes towards paying the principal (the amount of money borrowed), and the other part pays the interest (the fee charged for borrowing the money.)

  • The more money put down, the less you will have to borrow and the less interest you will have to pay over the length of the mortgage.
  • You will have a conventional mortgage with a down payment of 20% or more of the purchase price.
  • You will have a high-ratio mortgage if your down payment is less than 20% of the purchase price. A high-ratio mortgage must be insured to protect the lender. This insurance is called mortgage default insurance, which covers the lender in case the borrower defaults on the loan.
  • Canada Guaranty, Canada Mortgage and Housing Corporation (CMHC), and Genworth Canada help first-time home buyers who do not have funds for a down payment.

The mortgagor is the person borrowing money.

The mortgagee is the lender of the money. 

 

PRE-APPROVAL 
It is essential to obtain pre-approval for the amount of money you can borrow from a lender and avoid looking at homes that are out of your price range. The pre-approval process usually guarantees a rate of 90 days. In some cases, a lender may ask for a guarantor to provide additional security for the lender. 

A Guarantor is a person who signs the mortgage documents along with the borrower but does not have any interest in the ownership of the property.

CREDIT SCORE
A credit score summarizes your credit history and how consistently you pay your financial obligations. Good credit history and credit score are critical when purchasing a home. A poor credit score may determine whether you have to pay a higher interest rate. Your credit score indicates how likely you are to repay future debts and can speed up or slow down your mortgage approval process. More than one credit report bureau keeps records on you. Equifax and TransUnion are the two principal credit bureaus in Canada. Click the links to find out your score

Equifax or Transunion 

 

TERMS
The term of a mortgage is the length of time a lender will loan mortgage funds to a borrower. This duration can be from six months to ten years, with two to five years being the most common.  The shorter the duration of a mortgage term, the lower the interest rate. At the end of each term, you will either pay off the balance owing or renegotiate the mortgage for another term until the entire mortgage is paid back.It can take 15 to 30 years to pay off your mortgage ultimately. Amortization is fully paying off your loan in installments of principal and interest over a definite period. 

SHORT TERM
Short-term agreements are usually for two years or less. Short-term mortgages offer lower interest rates than long-term mortgages. People who believe that interest rates are currently higher than they will be in the future generally choose a short-term mortgage. 

LONG TERM
Long-term agreements are for three years or more. Long-term mortgages cost more than short-term mortgages, so that the interest rate will be higher. A higher interest rate appeals to borrowers who value the stability and predictability of fixed expenses over a set period. A stable mortgage payment is more accessible to budget.


RATES
An interest rate is the amount of interest charged on loan. It is based on the rate the Bank of Canada charges lenders to lend money. Interest rates are generally lower if you borrow money for a short period and higher if you borrow the money for a more extended period. The interest is usually paid as part of your regular mortgage payment, along with an amount paid to the principal. This is referred to as a blended principal and interest payment.

FIXED-RATE MORTGAGE
With a fixed-rate mortgage, your interest rate will not change during the term of your mortgage. You will know exactly how much your payments will be and how much your mortgage will be left by the end of the term. At the end of the term, if there is still a balance and time left on your amortization period, the lender will offer a renewal with a choice of a new term and the interest rate available.

VARIABLE/ADJUSTABLE-RATE MORTGAGE
When you agree to a fluctuating interest rate for the length of the term, you have a variable-rate mortgage. Interest rates fluctuate with the bank's prime lending rate and may vary monthly. When interest rates change, your payment amount remains the same, but the amount applied to the principal will change. Therefore, if interest rates drop, more of your mortgage payment is applied to the principal balance owing.

With an adjustable-rate mortgage, the payment will automatically adjust when there is a change in the prime interest rate. And will ensure that enough money will be paid toward each payment's principal amount to have the mortgage paid off at the end of the amortization term.

FINALIZING YOUR MORTGAGE
When you and the seller agree on the price to be paid for the house, you must provide a deposit. A deposit is an advance payment of part of your down payment. It is paid at the time of signing the Agreement of Purchase of Sale, a legal document the buyer and seller approve detailing the price & terms of the transaction.

It is important to keep in mind that you will also be required to pay property tax. Property tax is paid on privately owned property and is usually paid semi-annually or monthly. As well as some other closing costs like an appraisal. Here is a list of closing costs you should expect.

You will be required to provide the following list of information to your mortgage professional to finalize the mortgage:

  • Valid identification
  • Confirmation of income or employment earnings
  • Current bank information
  • Evidence of your down payment
  • List of assets
  • List of liabilities
  • Contact information for your lawyer
  • Copy of the Purchase Agreement
  • Copy of the MLS listing
  • Contract and building plans if your home is being built
  • Authorization to perform a credit bureau inquiry
  • Letter from the insurance company
    • indicating sufficient property insurance coverage for the new purchase
    • showing the lender as a lien holder should be added

 

 CLOSING COSTS

  • Appraisal Fee
    The process of assessing the value of a home is usually to determine a selling price. This value may or may not be the same as the home's purchase price.
  • Deposit
    Money is put towards purchasing a home to prove the buyer is committed to fulfilling the purchase transaction. The amount of the deposit varies based on the purchase price.
  • Down Payment
    A partial payment is made at the time of purchase. When purchasing a property, first-time home buyers can put as little as zero.
  • Home Inspection Fee
    The cost is paid to a building inspector to examine the house before purchase and is usually selected by the purchaser.
  • Land or Property Transfer Tax
     A tax paid on property that changes hands. First-time buyers may be eligible for a rebate in certain provinces.
  • Legal Fees
    The cost paid to have a lawyer finalize the property transfer between the seller and the purchaser.
  • Mortgage Loan (Default) Insurance
     Mortgage loan insurance enables homebuyers to purchase a home with as little as 5% down payment. The insurance premium amount depends on the amount borrowed from the lender.
  • Title Insurance (optional)
    Title Insurance provides the purchaser coverage against title risks inherent in real estate transactions (including title fraud) for as long as you own your home. In many cases, it is required by the lender that the borrower has title insurance to provide coverage for the lender. Most lawyers recommend that the borrower also gets additional coverage for themselves.

Looking for more information

The Different types of mortgages 

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