WHAT IS A MORTGAGE?
A mortgage in the literal sense, is a deed in which the owner of land (the mortgagor) assigns his / her interest in the property to someone else (the mortgagee); to secure the borrowing of money. This is subject to a whole list of conditions on the fulfillment of which the assignment is cancelled and the mortgagee’s interest falls away. Given that the purchase of a property entails the borrowing of money to be secured by a charge over the property in favour of the lender, the term ‘mortgage’ has become synonymous with a loan for the acquisition of property usually repayable over a long period – up to 30 / 35 years.
Mortgage – A long-term loan primarily for the purpose of buying a home. A mortgage is a legal agreement in which the borrower pledges the property being purchased as security for the loan.
Principal – The amount of the loan – the cash you actually borrow.
Term – The number of months or years the mortgage covers. Normally, it will be anywhere from six months to five years.
Amortization – The actual number of years it will take to repay the mortgage in full. This is usually much longer than the term of the mortgage.
Equity – The difference between the amount for which the property could be sold and the amount you still owe on the loan.
Types of Mortgages
Pre-Approved Mortgage – Preliminary approval is given by the lender of the borrower’s application for a mortgage to a certain maximum amount and usually with a guaranteed rate for a set period of time.
Conventional Mortgage – A loan for no more than 75 per cent of the appraised value or purchase price of the property, whichever is less.
High Ratio Morgage – A mortgage usually for more than 75 per cent of the appraised value or purchase price of the property. Such a mortgage is often referred to as an NHA mortgage because it is granted under the provisions of the National Housing Act. These mortgages must, by law, be insured through GE Mortgage Insurance Corporation or the Canada Mortgage and Housing Corporation (CMHC).
First Mortgage – The debt registered against your property that has to be paid first in the event of sale or default.
Second Mortgage – A mortgage granted when there is already one other mortgage registered against the property. If the borrower defaults and the property is sold, the second mortgage is paid after the first mortgage.
Leasehold Mortgage – A mortgage on a home and/or improvements where the land is rented rather than owned.
Collateral Mortgage – A mortgage backed by a promissory note and the security of a mortgage on real property. The money borrowed is usually used for other purposes, such as home improvements, a vacation or a business investment.
Bridge Financing – A special, short-term loan needed to cover the time gap between completing the purchase of a property as agreed and finalizing arrangements to pay. This usually occurs when two properties are involved and the closing dates do not match.
Terms and Conditions
Fixed Rate Mortgage – A mortgage for which the rate of interest is set for a specific period of time (the term of the mortgage). The regular payment of the principal and interest remains the same throughout the term.
Variable Rate Mortgage – A mortgage for which the rate of interest changes from time to time as money market conditions change. The amount of the regular payment of a variable rate mortgage does not change. The difference lies in the way the payment is applied. If interest rates go up, more of the regular payment will be applied toward interest. If interest rates go down, more of the regular payment will be applied toward the principal.
Open Mortgage – A mortgage which allows the borrower to repay the loan more quickly than agreed, usually with prepayment charges.
Closed Mortgage – A mortgage that generally does not allow the borrower to repay the loan more quickly than agreed.
Portable Mortgage – A mortgage where the principal balance, the term remaining and the interest rate are transferred to a mortgage on your new property.
Blended – Occurs when you combine the mortgage balance outstanding on the home you are leaving and adding additional financing to purchase your new home. The interest rate will change to one that combines the rate on your old mortgage with the rate in effect at the time you add additional financing.
Compound Interest – Interest charged on interest owing. The more frequent the compounding, the more interest will be paid.
Buying Down – A term used when quoting interest rates. It means that someone, usually the vendor or seller, has arranged with the mortgage lender to prepay a portion of the interest owing on the mortgage. This allows you, the new borrower, to assume a mortgage debt at an interest rate lower than the current or stated rate.
FAQ ABOUT MORTGAGES
Just about all lending agencies are advertising their mortgages, how do I know which one is best for me?
Like any other commodity, acquiring a mortgage is a buying decision and so it is appropriate to check all available products before you buy. Shop around. Some questions you need to ask are:
What minimum down payment is required? Some lenders will provide 100% financing so that you may only have to provide the fees and expenses. However, the more you borrow the more you will pay back in the end so that if you are in a position to make a down payment it reduces the borrowing requirement.
What is the rate of interest?
Is this rate fixed or variable? If fixed, for how long? A fixed rate of interest means that during this period the rate of interest charged and consequently the payment will not change. The longer the time for which the rate is fixed the higher the rate is likely to be. A variable rate enables the lending institution to adjust the rate of interest immediately if there is any movement in interest rates generally.
If the rate is variable, what will be the basis for an increase? This change could be linked to a movement in the savings rate, the Central Bank’s rate to the Commercial Banks or changes in the Commercial Bank’s base lending rate. However, it must be recognized that a movement in one, more often than not, results in some change in the others.
Can the loan be prepaid with or without penalty? Most mortgages will have a condition to do with early repayment of the mortgage or prepayment of installments.
How much notice of prepayment is required? Will a penalty still apply even with notice?
What fees are payable in connection with the transaction? Are there commitment and negotiation fees? Negotiation/Arrangement fees are charged by lending institutions to compensate for the work involved in the processing of the application. Commitment fees are applied on the undrawn portion of the loan after it has been approved and not drawn by a specific period.
If I pay every month but am sometimes late on a payment, is that a strike against me?
Any lender requires that agreed installments are paid promptly on due dates. Where the due date is not a working day, payment on the following working day is acceptable. To avoid late payments as far as possible, it is recommended that an account be set up with the Bank and an arrangement made for the payments to be transferred to the mortgage (a standing order). Of course, you will need to ensure that enough funds are maintained in that account to cover the monthly payments. While the occasional late payment may not be seen as a problem, chronic late payments will be frowned upon. If you find yourself in a position where the installments cannot be met on the due date, you should contact the lender and advise when you will be making the payment.
What is a bridging loan and when is it needed?
A bridging loan is required when a property is being constructed. You will recall that the lender always wants to know that the amount of the loan is covered by the value of the property. Where the borrower is building a house, the most he/she may have is the land – the value of which is unlikely to cover the total amount to be borrowed. Furthermore, the lender needs to be sure that all the money being lent is spent on the property. One way to control this is to allow payment to the borrower in stages and in amounts drawn is accounted for before further drawings are allowed.
One advantage this provides for the borrower is that he / she is only required to pay interest on the amount actually drawn until the house is finished.
How difficult is it to obtain a mortgage when my credit rating is very low?
Like any other borrowing, your credit rating will affect your ability to obtain a mortgage. If you have had difficulties in the past, you will need to convince the lender that you have been able to overcome those difficulties and are now in a position to handle another obligation without problems.
My partner and I want to make extra payments per year, how is that done and how much time and money will I save?
Most mortgage deeds include a condition in relation to increased / accelerated payments. These usually require multiples of 3 and prior notice is required. Clearly if you reduce the principal debt faster than proposed, the debt will be repaid sooner and interest you pay over the life is reduced.
What advice can you give to a first time homeowner?
Do some investigation up front. You will need to find out from a financial institution, real estate agent and /or lawyer, what information is required to obtain a mortgage. The amount of down payment you may need to provide, the level of fees and expenses involved in a transaction. The time it will take to process an application and to complete the matter. If you are looking to build a home check with a builder/contractor/architect to get some idea of the likely cost
The main issue which you will need to resolve is how much you can afford to borrow and therefore the cost and type of house which you can build.
You must therefore obtain as much information as possible to assist you in making an informed decision.
Can anyone qualify for a mortgage?
While there are other considerations, the major requirements for qualifying for a mortgage are the ability of the borrower to meet the repayments comfortably and the value of the property. The lending institutions need to be satisfied that the value of the property which they are financing is more than the amount of the loan. The larger the margin between the two amounts the more comfortable they are. The applicant’s ability to meet the installment means that the loan can be repaid as agreed and the lending institutions do not have to put the property up for sale to recover the money lent.
How is the interest rate calculated?
It must be remembered that the lending institutions pay interest to depositors for the money which they in turn lend out. Therefore in determining the rates at which they lend they have to factor in this cost so that they can earn a profit for their business.
Interest rates are calculated on the basis of what it costs the lending institution to raise the money to lend.
Why is a down payment needed?
Most lending institutions require a down payment ranging from 5% to 20%. This down payment provides the lender with a margin between the amount being lent and the value of the property as added protection in the event the borrower is unable to pay for some reason and the property has to be sold to repay the loan. Generally, where more than 80% of the value of a property is lent, the lending institution will take out insurance to cover the excess. This is a one off payment made up front, the cost of which is borne by the borrower
It is usually the case that where an individual has made some monetary contribution to an asset / project he or she is likely to be more committed to it than if it is provided outright with no contribution on their part. They will try harder to ensure that it is not lost.
How long do I need to be in a job before I can apply for a mortgage?
While there is no stated minimum employment period for a mortgage applicant, the lending institution must be satisfied that the borrower is in stable employment. Generally, someone on probation would unlikely be considered. Even if an applicant has been in a job a relatively short time but may be considered to be readily employable and able to generate the required level of income, he / she may still be considered suitable