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Mortgages - What You Need
to Know
Mortgages Explained
Basically, a mortgage is just a loan that
is to be used to finance the purchase of property. The property
itself is used as security to ensure repayment and the lender
holds the title or deed to the property either directly or indirectly
(depending on your jurisdiction and type of lender) until you
have repaid the entire amount plus interest.
When shopping for a mortgage you should keep in mind that there
are many different types available. They can range from fixed
rate mortgages where the interest rates never change, to variable
rate mortgages where interest rates are pegged to the Bank of
Canada rate, allowing them to rise or fall over time as the economy
changes. Between these two extremes are a variety of other products
that attempt to blend the advantages of the guaranteed interest
rates of fixed rate mortgages with the interest rate flexibility
found in variable rate mortgages. The length, or "term" of a mortgage,
is also an important factor to consider. You can choose between
short-term mortgages that need to be renegotiated every year and
long-term mortgages where you lock your loan in for up to 25 years.
One of the most important things you need to do before committing
to any type of mortgage is to sit down with a mortgage professional
and examine the advantages and disadvantages of all available
options and determine which product is best suited to your current
situation and future plans.
There are Three Basic Mortgage Formats:
- Conventional Mortgage
With a conventional mortgage the purchaser has to have saved
at least 25% of the purchase price as a down payment. You
are allowed to borrow up to 75% of the purchase price or the
appraised value of the property, whichever is less. Whenever
a mortgage exceeds 75% of the value of the property it must
be insured, thus becoming a high-ratio mortgage.
-
- Insured or High-Ratio Mortgage
With a high-ratio mortgage the purchaser has less than a 25%
down payment. These mortgages are often referred to as NHA
mortgages because they are granted under the provisions of
the National Housing Act. You can borrow up to 95% of either
the purchase price or the appraised value of the property
(whichever is less) but are required by law to insure the
mortgage and pay a onetime insurance premium based on the
total value of the mortgage. For insurance you can either
use the Canada Mortgage and Housing Corporation (CMHC) or
a government approved private insurer. Mortgage loan insurance
premiums range from 1.25% to 3.75%, depending upon the size
of the down payment. The general rule of thumb for high-ratio
mortgage premiums is....
- If the mortgage is 75% to 80% of the purchase price:
1.25% premium due on the mortgage value.
- If the mortgage is 80% to 85% of the purchase price:
2.00% premium due on the mortgage value.
- If the mortgage is 85% to 90% of the purchase price:
2.50% premium due on the mortgage value.
- If the mortgage is 90% to 95% of the purchase price:
3.75% premium due on the mortgage value.
This insurance premium may be either paid up front
or added to the mortgage. If added to the mortgage, a $150,000
mortgage with a 5% down payment would translate into a $155,625
mortgage ($150,000 mortgage + 3.75% insurance premium). The
extra insurance premium increases the mortgage payment by
about $35 per month at a 7% interest rate. There are additional
criteria to be considered when applying for a high-ratio mortgage
such as minimum loan terms allowed, maximum amortization periods,
allowable purchasers' debt levels, source of the down payment
if less than 10%, use of the property (single family/duplex/investment),
plus many more. There is even a maximum purchase price allowed
with a 5% down payment. It can range from $125,000 to $250,000
and depends on which Canadian City you are purchasing in.
Feel free to ask you realtor or mortgage lender for a more
in-depth explanation, or visit the large and detailed Canada
Mortgage and Housing Corporation site.
-
- Pre-Approved Mortgage
A pre-approved mortgage is not actually a mortgage at all.
It is the preliminary approval by the lender of the borrower's
application for a mortgage. It usually sets out the maximum
mortgage amount allowed, with an interest rate guarantee for
60 to 90 days. This approval is subject to a satisfactory
appraisal of the subject property and a credit review of the
buyer so it is highly advisable to make any offer to purchase
conditional upon financing.
Click here to read about Mortage
Features and Incentives
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