Understanding Mortgages

What is a Mortgage?

A mortgage is a legal agreement between a borrower and a lender, which sets out the terms and conditions of the loan. It is a loan taken out to purchase a property, and the lender has the legal right to take ownership of the property if the borrower fails to make the payments as agreed.

Types of Mortgages

There are several types of mortgages available, including fixed-rate mortgages, adjustable-rate mortgages, and interest-only mortgages. Each type of mortgage has its own unique features and benefits, and it’s important to choose the right one based on your financial circumstances and future plans.

Secured Loan

Unlike most types of loans, a mortgage is a secured loan, which means that the loan is secured against the property being purchased. This gives the lender the legal right to take possession of the property if the borrower defaults on the loan.

Qualification Requirements

To be eligible for a mortgage, you will need to meet certain qualification requirements, including passing a stress test, having a down payment, and proving that you have a stable income. These requirements may vary depending on the lender and the type of mortgage you are applying for.

Repayment of Mortgage

A mortgage typically has a long repayment period, and you may have to renew your contract multiple times until you finish paying your balance in full. Additionally, unlike other types of loans, you may have a balance owing at the end of your mortgage contract, which will need to be paid in full.

Penalty for Breaking a Mortgage Contract

If you decide to break your mortgage contract early, you may have to pay a penalty to the lender. This penalty can be significant, so it’s important to carefully consider your options before deciding to break your contract.

Conventional Mortgages

A conventional mortgage is a mortgage that is not insured or guaranteed by the government or any other insurer. This means that the borrower is responsible for paying the entire mortgage amount and the lender is taking on all the risk. Typically, lenders require a down payment of at least 20% of the home’s purchase price. The advantage of a conventional mortgage is that there is no need to pay for mortgage insurance, which can save the borrower thousands of dollars over the life of the mortgage. Many lenders will bulk-inure these types of mortgages in Canada these mortgages so that they can be sold as investments. This insurance is at the lender’s expense.

High Ratio Mortgages

A high-ratio mortgage is a mortgage where the down payment is less than 20% of the home’s purchase price. To obtain a high-ratio mortgage, borrowers are required to pay for mortgage insurance, which protects the lender in case of default. Mortgage insurance is provided by the Canada Mortgage and Housing Corporation (CMHC) or other private insurers. The premium for mortgage insurance can be paid upfront or added to the mortgage amount. The advantage of a high-ratio mortgage is that it allows borrowers to purchase a home with a smaller down payment, but the disadvantage is that mortgage insurance can be expensive.

Fixed Rate Mortgages

A fixed-rate mortgage is a mortgage where the interest rate is locked in for the entire term of the mortgage, typically ranging from 1 to 10 years. The advantage of a fixed-rate mortgage is that the borrower knows exactly what their mortgage payments will be over the term of the mortgage. This can help with budgeting and planning. However, the disadvantage is that if interest rates drop during the term of the mortgage, the borrower may end up paying a higher rate than the current market rate.

Variable Rate Mortgages

A variable rate mortgage is a mortgage where the interest rate fluctuates based on market conditions. The interest rate can be tied to the Bank of Canada’s prime lending rate or to the lender’s prime lending rate. The advantage of a variable rate mortgage is that the interest rate can be lower than a fixed rate mortgage, which can save the borrower money over the life of the mortgage. However, the risk is that the interest rate can also rise, which can increase the borrower’s mortgage payments.

Open Mortgages

An open mortgage allows the borrower to pay off the mortgage at any time without penalty. This type of mortgage is typically used for short-term financing, such as when the borrower expects to receive a large sum of money in the near future. The advantage of an open mortgage is that the borrower has the flexibility to pay off the mortgage early without incurring penalties. However, the interest rate on an open mortgage is usually higher than on a closed mortgage.

Closed Mortgages

A closed mortgage has a fixed term and cannot be paid off without penalty before the end of the term. The advantage of a closed mortgage is that the interest rate is usually lower than an open mortgage. This can save the borrower money on interest charges over the term of the mortgage. However, the disadvantage is that the borrower does not have the flexibility to pay off the mortgage early without incurring penalties

Debt Consolidation Mortgages

Debt consolidation mortgages are a type of mortgage that allows borrowers to consolidate their high-interest debts into a single, lower-interest mortgage payment. With a debt consolidation mortgage, borrowers can pay off their outstanding debts, such as credit cards, personal loans, and car loans, by using the equity in their homes.

Cash Back Mortgages

A cash-back mortgage is a mortgage where the borrower receives a cash payment at the time of closing. The cash payment is typically a percentage of the mortgage amount. The advantage of a cash-back mortgage is that the borrower can use the cash to pay for closing costs or to pay down other debts. However, the interest rate on a cash-back mortgage is usually higher than on a conventional mortgage.

Equity Mortgages – Private Mortgages

An equity mortgage is a mortgage that allows the borrower to borrow against the equity in their home. This type of mortgage is typically used for home renovations or to consolidate high-interest debt. The interest rate on an equity mortgage is usually higher than on a conventional mortgage.