Are you in the market for a new house? For most people a mortgage is the biggest loan they will ever apply for. Banks are the traditional mortgage lender. You can shop around for the best interest rates or go through a mortgage broker who will do most of the legwork for you and negotiate the best deal. Other sources for mortgages are credit unions, pension funds, and various government agencies.
What is a Mortgage?
A mortgage is a loan specifically designed to purchase a home or property, where your home functions as collateral. Typically a bank or mortgage lender lends you a large sum of money, usually 80% of the purchase price, which you must pay back within an agreed period of time. The lender charges interest on the loan and if you fail to pay back the loan the lender can take posession of your home through a process called foreclosure. It is very important that you understand the terms of your mortgage, particularly with non traditional loans.
Types of Mortgages
There are many different types of mortgages available to the property owner. Below is a brief outline of the different types of mortgages available.
Low Ratio Mortgage: A mortgage where the down payment is equal to or higher than 20% of the purchase price of the property. This type of mortgage does not usually require mortgage protection insurance.
High Ratio Mortgage: A high ratio mortgage is one where the borrower is contributing less that 20% of the purchase price of the property as a down payment. This type of mortgage requires mortgage protection insurance from one of the three mortgage insurance companies in Canada. Canada Mortgage and Housing Corporation, Canada Guarantee, or Genworth Financial.
Fixed Rate Mortgage: The interest rate on a fixed rate mortgage is determined and locked in for the term of the mortgage. This offers the buyer stability, as they know ahead of time what rate they will be paying, no suprises!
Variable Rate Mortgage: The interest rate on a variable rate mortgage can be changed during the term of the mortgage. The loan is initially set up like a standard loan, based on the current interest rate. The mortgage is reviewed at specified intervals and if the market interest rate has changed, the lender can alter the mortgage repayment plan by changing the interest rate or the amortization period or both.
Open Mortgage: An open mortgage allows the borrower flexibility in repaying the loan at any time, without penalty
Closed Mortgage: A closed mortgage cannot be renegotiated, refinanced or prepaid before maturity.
First Time Home Buyers Plan (Canada)
The Home Buyers' Plan was introduced to help couples to buy their first home. The program allows you to withdraw up to $25,000 from your registered retirement savings plan (RRSP) to buy or build your first home.
Your contributions must remain in your RRSP for a minimum of 90 day before you can withdraw them under the HBP ot they may not be deductible for any year. This money has to be repaid to your RRSP each year for a period of 15 years until the balance of your HBP is zero. If you do not repay the amount due that year it will have to be included in your income for tax filing purposes.
Downpayment - The amount of money the home buyer pays towards the purchase of a new home.
Mortgage - a loan to a property owner with home as collateral
Principal - amount of money borrowed by the purchaser.
Interest - Amount of money paid to lender for use of the loan.
Mortgage Term - The period of time your agreement with the lender is in effect, usually between 6 months to 5 years.
Maturity date - the date the mortgage term ends
Amortization period - the length of time it will take to pay off the principal amount of the mortgage. Usually 25 or 30 years.
A reverse mortgage is type of mortgage that is available to homeowners over 62 years of age. A reverse mortgage is a loan against the home that does not have to be paid back as long as the owner is alive and living in the house.
As the name suggests a reverse mortgage works the opposite way of a traditional mortgage. Your debt gradually increases and your equity in your home gradually decreases. You remain the owner of the home and must still pay the property taxes, home insurance and pay for any necessary repairs to the home. Failure to do so could result in the lender asking for repayment of the loan.
Mortgages can be purchased from a variety of lenders and it is up to you to research your options and to understand the terms offered. If you don't want to shop around you can go to your regular banking institution or if you want someone else to shop around for you, you may prefer to work with a mortgage broker.
- Insurance Companies
- Credit Union
- Mortgage Broker
- Savings & Loan Associations
- Private Individual
- Stock Brokerages & Online Lenders
- Commercial Mortgage Bankers
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
Foreclosure can occur when the homeowner defaults on their monthly mortgage payment. The lender can seize the property and sell it in an effort to recoup the cost of the loan.