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Arranging a MortgageA mortgage is a formal document by which the borrower (mortgagor) gives the lender (mortgagee) a lien on real property as security for a debt. The borrower has use of the property, and the lien is removed when the obligation is fully paid.Sorting through the numerous mortgage options available to today’s home buyers can be intimidating, but professional help is readily available. Your REALTOR® can offer you invaluable information along with your financial institution’s mortgage specialist and other advisors. Lenders include banks and trust companies, along with some credit unions and private lenders. There’s also the option of consulting a mortgage broker. A number of different mortgage options are available. Under a conventional mortgage, lenders will loan you up to 75% of the appraised value or purchase price of the property (whichever is lower) to a maximum set by government regulation and you must come up with the remaining 25% down payment yourself. If you don’t have the 25% down payment, a high-ratio mortgage may be available, which would provide you with up to 95% (up to 100% with good credit) of the appraised value or purchase price of the property (whichever is lower) to a maximum set by government regulation. The proviso is that high-ratio mortgages must be insured, with you bearing the cost of that insurance. The lower your down payment, the higher your premium will be – this amount can be added to your mortgage balance (see our CMHC section for more details). You may find yourself in a situation where you can assume an existing mortgage held by the seller. Advantages of this are that you can speed the buying process due to reduced paperwork and save money in lower legal fees and closing costs. A possible disadvantage is that the current lending rate may be less or more than that of the assumed mortgage. Variable-rate mortgages (or floating rate mortgages) are usually offered for both conventional and high-ratio mortgages. If interest rates climb, you will be paying more per month in interest; if rates drop, you will be paying more off your principal. Fixed-rate mortgages, on the other hand, maintain the same rate of interest over the entire negotiated term. With an open mortgage you can pay off as much of your debt as you wish, whenever you want, without penalty. This could allow you to pay your mortgage off more quickly, potentially saving you thousands of dollars in interest over the long run. If you want flexibility, an open mortgage can be a good option. Key Terms/Concepts:Purchase Price: The amount of money paid for a property. Amount of the Mortgage: The amount of money borrowed from a lending institution to help pay for a property. Down Payment: The amount of money put forward by the purchaser. It represents the difference between the purchase price and the amount of the mortgage loan. Term: The length of time that a mortgage agreement covers (interest rate term). Payments may not fully repay the outstanding principal by the end of a term because the amortization period is longer. Typically terms range from six months to five years, but it’s possible to arrange seven, ten and even twenty-five year mortgages. A short-term mortgage is typically for two years or less, whereas a long-term mortgage is for three years or more. Generally speaking, the longer the term, the higher the interest rate. The benefit of a long-term mortgage is the security of knowing exactly what your interest rates and payments will be for an extended time. Amortization Period: The number of years it will take to repay a mortgage loan in full. This period can be greater than the term of the loan. For example, mortgages often have a five year term but a 25 year amortization period. New rules allow longer amortizations, up to 40 years, but come at a substantial cost – talk to your mortgage specialist. Gross Debt Service Ratio (GDSR): The percentage of gross annual income required to cover payments associated with housing (mortgage principal and interest, taxes, secondary financing, heating and 50% of condominium fees if applicable). Most lenders have established that GDSR should not exceed 32% of gross annual income. Total Debt Service Ratio (TDSR): The percentage of gross annual income required to cover payments associated with housing and all other debts and obligations, such as payments on a car loan. Most lenders have established that the TDSR ratio should not exceed 40% of gross annual income. 1. Net income may apply in some circumstances. 2. The maximum for mortgage approval may vary. For CMHC’s First Home Loan Insurance Program, the TDSR requirement is 35%. Pre-payment privileges: These allow you to pay money against the principal, reducing the total amount of interest you will ultimately pay. This is an important feature of your agreement. Many institutions permit an annual lump sum payment or extra regular payments, usually by 10% or 15% annually. This can save you thousands of dollars in interest costs over the life of your mortgage. Compound interest: This refers to the interest that’s charged on the interest owing on your mortgage. The more frequent the compounding, the more interest you’ll pay. Most traditional mortgages have the interest compounded semi-annually. In the case of variable rate mortgages, interest is usually compounded monthly. Increases in regular payments: Some lenders will let you increase your regular payments, usually by 10% or 15% annually. This can save you thousands of dollars in interest costs over the life of your mortgage. Frequency of payments: With this option, you are not confined to making your mortgage payments monthly. You can coincide your payments with your pay cheques, making them weekly, for example. This flexibility may help you to budget better and, the more frequently you pay your mortgage, the more you’ll save on interest costs over time. Portability: If you are selling your present home and buying another, this option allows you to take your mortgage – with the same term, rate and amount – and apply it to your new house. If your mortgage isn’t portable, don’t sign for a longer term than you’re likely to stay in the house or you could wind up paying a penalty to break the mortgage agreement. Assumability: This feature allows the buyer of your house to take over or assume your mortgage. If your mortgage has a fixed interest rate lower than current rates, it could be an attractive selling feature. In most cases, your lender will release you from your mortgage, meaning that, if the buyer defaults, you won’t be responsible for the payment. But, if the buyer doesn’t meet the lender’s usual credit requirements, the responsibility could fall into you lap. As provincial laws vary, check with your solicitor or notary. Early Renewal: This allows you to renew your mortgage before it matures. It is a useful option if you expect mortgage rates to increase, because it allows you to change to set up a fixed long-term rate. If current interest rates are lower than your existing mortgage rate, you will likely have to pay a charge for renewing early. Your lender can calculate this for you. Second Mortgage: A second mortgage is granted when there is already a mortgage registered against a property. If the borrower defaults and the property is sold, the second mortgage is paid after the first. Different lenders may offer other features and options such as a convertible mortgage, blending and extending interest rates and interest rate buy down. Confused? Take a look at our Mortgage Glossary . . This information is provided by the London and St. Thomas Association of REALTORS®. The information herein is believed to be accurate and timely, but no warranty as such is expressed or implied. |
London and St. Thomas Association of REALTORS®, 342 Commissioners Rd.W., London, Ontario. N6J 1Y3 - Phone 519-641-1400 - Fax 519-641-4613
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