Mortgage What is a Mortgage
Mortgage is a loan secured by a lien on your home. The amount of your mortgage is typically the purchase price of the home minus your down payment. There are two basic types of mortgages: Variable Rate Mortgages (VRM) and Fixed-Rate mortgages. There are also less common types of mortgages such as balloon mortgages, bridge mortgage (also known as bridge financing) and construction mortgages. When searching for a mortgage, it's important to understand the details of the payment terms. You will want to consider the interest rate, the length of the loan, the initial fees and points on the loan, and how property insurance and real-estate taxes are paid. Mortgages are competitive, so shop around online to find the best rate. Mortgage Basics
what the does "mortgage" mean anyway?
Strangely enough, the word "mortgage" comes from the French word "mort," which means "dead," and "gage," from Old English which means "pledge".
According to Sir Edward Coke (who lived from 1552 to 1634), the term came from the doubtfulness of whether or not the mortgagor would pay the debt! In those days, if the mortgagor did not, then the land pledged as security for the debt was taken away. The land was considered 'dead' to the mortgagor. (In other words, as if the person never had it.)
Nowadays, the term mortgage is commonly used to refer to a loan for the purpose of purchasing a property. We don't associate anyone's death with it! (Although, it might seem as if you might be dead before your mortgage is paid off.)
Home mortgages are the most common type of mortgage. Very few of us will be in the unique position of paying cash for our home.
Unlike most loans, your home mortgage will be renegotiated before you've paid it off. This is standard. In fact, you will have a 'life' of the home mortgage and a 'term' for the interest rate that you pay. The life of the home mortgage is commonly 20, 25 or 30 years. This represents the length of time in which your home will be paid off (if you pay regularly and with the specified amount).
You will also have a term for the interest rate that you pay on your home mortgage. This is the length of time over which you will have an agreed payment schedule with certain additional conditions. In effect, this is the time period over which you've agreed to: - Pay at a particular rate of home mortgage interest (either locked in or floating)
- Certain restrictions for additional payments (usually a certain percentage of the original home mortgage which you can put down each year)
- Certain restrictions for the increase of monthly home mortgage payments (usually a percentage of the specified monthly payment)
- Certain restrictions on your ability to re-negotiate the home mortgage interest rate (which is determined by whether the mortgage is "open" or "closed")
- Penalties if you want to renegotiate the terms of the home mortgage before the specified time period of the contract is expired.
This contractual agreement is normally from 6 months to 10 years. Note that many financial institutions will only negotiate terms for a home mortgage for 5 years or less.
Interest Rate Mortgage
A low interest rate mortgage is the fondest desire of every potential homebuyer.
How do you get a low interest rate mortgage? Well, while you can try to negotiate yourself with a commercial lender, you might also want to think about a mortgage broker.
A mortgage broker will do some of the footwork on your behalf. A mortgage broker may know about smaller lending institutions which are offering a much more competitive interest rate than a big bank or finance company. However, mortgage brokers will not necessarily work with all potential lenders. They are also not completely unbiased because they may prefer certain lenders who provide them with the best commission. So, you will always have to do some checking of your own.
Mortgage Broker may find some great options for you to get the lowest possible interest rate.
Once a mortgage broker identifies some good low interest rate mortgage options it's up to you to be sure that the mortgage, and its options, match your needs.
Also, don't just take the broker's word for it that a company is a good one…check! You have to remember that the mortgage broker will be getting a commission if you take your mortgage with the company they recommend. Since they get a commission they are not completely 'unbiased'. For instance, they could recommend a company which gives them a better commission level. So, check before you say yes.
In the end, even if you use a broker, do some research yourself? You'll be more confident when you do sign on the dotted line. More importantly, you might even find a better low interest rate mortgage deal than the one you're being offered. Assumable Mortgage
You've put in an offer on a house. The real estate agent says that the seller of the property has a mortgage on the property that is 'assumable' and it's at a great interest rate. What do you do?
Assumable mortgages are mortgages that can be passed from one owner to another. It can be an advantage to assume a mortgage if the interest rate is very good compared to negotiating a brand new mortgage.
Keep in mind that you cannot assume a mortgage unless you have a big enough down payment to cover the difference between the value of the house and the amount of the mortgage. Otherwise, you are in the situation of negotiating a second mortgage - which you should generally avoid. Second mortgages are often at much higher interest rates and any savings you get from assuming the first mortgage could be lost.
Also remember that when you assume a mortgage you assume it 'as is'. This means that it may not have the options you want, like prepayment privileges and payment frequency options. Read the fine print on any mortgage contract - but especially if you want to assume a mortgage. Be sure it's the best deal for you. Fixed Rate Mortgage
A large majority of people choose the fixed rate mortgage. This mortgage guarantees a certain interest rate for a period of time. The most popular fixed mortgages are 3,4 and 5 years. However, you can have a fixed mortgage for as short as 6 months or as long as 10 years.
The biggest selling feature of fixed mortgages is the 'guarantee' of the payment that you will be paying. However, if you pick a long-term fixed mortgage - say 5 years - you'll pay a lot for the privilege of having your interest rate locked in. In general, unless interest rates are steadily climbing you'll pay more in interest costs over the life of your mortgage if you choose long term fixed each time.
Why? You'll actually pay a much higher interest rate over a longer period unless interest rates go up fairly significantly.
In my own case, I stayed with terms of 6 months on my fixed mortgage and found that I was averaging from ¾ to 1 full percentage less in interest rates than those who had locked in at a five-year rate over the same time period.
However, there are some caveats: - This strategy works best when interest rates are staying fairly stable (within 1 percentage point or so) or are falling.
- You should have a mortgage lender who will allow you to lock in to a longer-term mortgage if rates go up and without a penalty.
If you have these two features through your lender go ahead and get a short-term fixed mortgage. The only downside is signing papers for your next term on a more frequent basis.
When looking at fixed rate mortgages don't be fooled by fancy promotions like cash back and other things. These incentives are usually restricted to 5 year and longer fixed rate mortgages. The lender can afford to give them because you are going to be their customer for a long time. Further, they don't reduce your interest rate which is the one thing that will really benefit you.
Your other best bet in an interest market where rates are staying the same or dropping is usually some form of 'variable' or 'adjustable' mortgage. These mortgages will allow you to get a better rate now in general (while the amount of your mortgage is higher) and will allow you to take advantage of fluctuating rates (which are hopefully moving in your favour). Again, you must have the option to lock in if rates go up. This will allow you to manage your risk. Simply keep a sharp eye on interest rates. Pay attention to what the analysts are saying about the short and longer-term future of rates. Then lock into a fixed rate mortgage from your variable or adjustable one.
This gives you the best of all possible worlds, including the lowest interest rate now and options later. But you have to make sure that you HAVE this option. Read the fine print. And be sure to ask your lender if it is possible before you sign the fixed rate mortgage papers.
Interest Only Mortgage
An "interest-only" mortgage is like a line of credit. You can pay only the interest on the mortgage. This can greatly reduce your payments in time of financial stress. However, it also means that the debt will never be paid off.
With an interest only mortgage, you pay only interest for the first five, 10, even 15 years of the loan. This can lower your monthly payment by quite a lot. And that seems to have increased the popularity of interest only mortgages in the past few years.
The interest only mortgage is an interesting mortgage type. All you pay over the life of the mortgage is the interest on the balance. However, there are options once this interest only period ends. You either begin to pay interest and principal at a faster rate than if you'd done that from the beginning, or you can choose the balloon mortgage approach, which means the total loan principal becomes due at the end of your term.
When do interest only mortgages become more popular? Typically, as interest rates rise and the cost of housing increases, more people will look at this type of mortgage. Why? At issue for some consumers is the size of their mortgage payment and making that payment lower. At the same interest rate, an interest only payment is less than a payment of both interest and principal. A lower payment can mean that you will have a higher budget for home shopping. And that makes a big difference for some home buyers.
Many interest only mortgages have an interest only period (5 to 15 years) and then you begin to pay both interest and principal. If your interest only mortgage has a term of 30 years, after your initial interest free term, you would begin to pay interest and principal. You would begin to pay principal as well as interest in order to pay-off the balance by the end of 30 years. This actually means that your payments will be considerably higher than they would have been if you'd paid off principal all along.
Other interest only mortgages are like balloon mortgages. However, most balloon mortgages would ensure that you are paying down the original principal over time. When you pay your final balloon payment, it would be less than the original loan amount because of your payments of both interest and principal. With an interest only balloon mortgage, your final payment should be exactly equal to your original loan amount. All you've paid is interest; all the principal of the loan remains.
When would you consider this kind of loan? The circumstances to consider this kind of loan would be unique. Usually, a family with a single wage earner should not be considering this type of mortgage. Your exposure to financial risk would be too high. However, investors might be interested. The advantage with an investment property, that you expect to go up in value, is that the interest you pay is tax deductible. Therefore, you can deduct the interest paid from your taxes, while you own the property. At the end of the period of the loan, you could then sell your property (hopefully at a profit) and take the returns to pay out the mortgage.
However, this is a gamble. There's no guarantee that the property appreciates in value. And there's no guarantee that you can sell it when you decide to. If you can't sell the property, you would have to refinance (unless you have made enough from the property to pay out the balance of your mortgage) and refinancing could cause you some challenges.
The other advantage to this kind of mortgage is that you can save or invest the money that you would have paid in principal on the loan. Again, this situation will usually favor investors of one kind or another.
Interest-only loans come with many of the options of other types of mortgages. With some, you can lock in a fixed interest rate for the full term, while others resemble adjustable rate mortgages (ARM), which carry a fixed rate for a certain number of years and then adjust every six months to a year.
What kind of savings are you looking at on your monthly mortgage payment? They can be significant. Let's look at an example: You borrow $200,000 using an interest only loan with a 4.75 percent rate and no principal payments due for five years. Your monthly payment will be just $791, or about $250 a month less than if you went with a regular 5-year ARM with the same interest rate.
This can really work for you, if your property appreciates in value. Of course, there's never a guarantee that prices will go up. And if you don't sell your property as planned, your monthly payment jumps drastically after your interest only period. You'll have to be prepared for that.
Interest-only loans can also make sense for people whose income is sporadic, either because they are paid on commission or because they receive a significant portion of their income in annual bonuses. In this case, you have the option of only paying interest some months, but can pay above and beyond the amount due when they get their bonus checks. There is typically no prepayment penalty on interest only loans. This gives you flexibility in applying extra money to your mortgage when you have it, and yet keep monthly payments low. Every Canadian's Dilemma: Variable v.s Fixed | 
The age old question when thinking about obtaining a mortgage is whether to go for a fixed mortgage or trust in the variable product. Today, with the fixed rates on the rise this has become questionable for every current home owner as well as those currently shopping for a home. Historically, based on different studies including a more recent one done by BMO variable rate may be preferential to a fixed mortgage rate because in the long run, it will save you money.
For those that are unaware, there are two types of interest rates that can be given when obtaining a mortgage: fixed or variable. A fixed rate is a set interest rate for a specified period of time (example: 6 months, 1 year, 5 years) that is paid on top of the mortgage, whereas a variable rate can fluctuate based on the prime rate set by the Bank of Canada. Today, the most competitive variable mortgages can be obtained at prime less half a percent: with prime being at 2.25%, this means a low rate of 1.75% to start with. The discount on prime rate is what would be fixed for the term of mortgage; however, prime rate can change every time Bank of Canada has a meeting. Bank of Canada can increase the prime rate by 0.25% to 0.5% each meeting, which means that prime rate cannot jump up a lot and the increases would happen gradually. One of the significant benefits of the variable rate mortgage is the convertibility option, meaning borrowers can convert to the fixed rate anytime during their mortgage term. The best type of variable mortgages would offer the client to convert at anytime to the lender's best fixed rate offered at that time for remaining of their term. Meaning, if there is three years left of the term the client can lock into the lender's best three years fixed rate offered at that time as opposed to locking into a longer term for a higher fixed rate! Here's some good questions that should be answered before you decide to stick with a variable mortgage: 1. Do you want to take advantage of lower payments that a below prime mortgage provides? 2. Do you want to pay down your mortgage faster while rates are lower? 3. Do you want to save money in interest costs? 4. Does your monthly budget allow for fluctuations in payments? If your answer to these questions is YES, then perhaps a variable mortgage should be considered. Let's look at a comparison of a five year variable at Prime less 0.40% and a five year fixed rate at 4.39%, $200,000 mortgage balance over 25 years amortization: On the variable rate mortgage not only is the balance remaining in five years $7,202 less but you paid less in monthly payments as well. Although one can't anticipate what prime will do over the next five years, historically variable mortgages outperform fixed rate mortgages. Taking advantage of the lower rates of a variable mortgage can save you money but the critical factor remains in the golden question: Does your monthly budget allow for fluctuations in payments? If the answer to this question is NO, then fixed rates should be considered as your safe option. Parmida Modiri, AMP
Mortgage Agent
Lic. #: M08005765
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