Mortgage 101


Mortgage 101

Mortgages are financial instruments that allow individuals to borrow money to purchase real estate, typically homes. Here’s a comprehensive overview of various aspects related to mortgages:

A mortgage is a loan secured by real estate, where the borrower agrees to repay the borrowed money over time, along with interest, through scheduled mortgage payments.

Key Participants
Borrower The individual or entity borrowing money to purchase a property.
Lender: The financial institution providing the loan. This could be a bank, credit union, or other lending institution.

Types of Mortgages:

Open & Closed Mortgages
With shorter terms (six months to a year), an open mortgage allows you to pay off a portion of, or the entirety of your mortgage without penalty. The rates are in general higher for this.
Closed or fixed mortgages are more structured, but it’s not impossible to pay them off sooner. Fixed mortgages lock you into an interest rate for three to 25 years!
Fixed mortgages have lower rates than open mortgages.

Variable Rate Mortgages
Many people have questions about variable mortgages, included what exactly they are. Your rate is based on the Bank of Canada’s rate with a premium added, making the Prime Rate. The Prime Rate is what most lenders use as part of their Variable Rate Mortgages.

Reverse Mortgages
Convert equity of your mortgage into cash with the burden of having to sell your property, or make regular payments. You must be 62 years old and up and must have gathered a significant amount of equity.

Handyman’s Special
Also known as a renovation mortgage, the Handyman’s Special allows buyers to purchase a fix-me-upper and renovate it right away. A Purchase Plus Improvements mortgage factors in the cost of home improvements, so you pay for renovations along with your mortgage.

OAC, E&OE, Rates are subject to change

Down Payment
Borrowers typically need to make a down payment as a percentage of the property’s purchase price. The down payment amount can affect the mortgage terms.

Mortgage Insurance
Required for high-ratio mortgages where the down payment is less than 20% of the property value. Insurance protects the lender in case of default.

Amortization Period
The total time it takes to pay off the mortgage. Common amortization periods are 25 to 30 years.

Mortgage Term
The duration of the current interest rate agreement. Terms can range from months to several years.

Interest Rates
The cost of borrowing. Rates can be fixed or variable and depend on factors like market conditions, the borrower’s credit score, and the type of mortgage.

Prepayment Privileges
Some mortgages allow borrowers to make extra payments or pay off the mortgage before the term ends without penalties.

Closing Costs
Additional costs associated with finalizing the purchase, including legal fees, property transfer taxes, and home inspection fees.

Borrowers may choose to refinance their mortgage to access home equity or secure a lower interest rate.

If a borrower fails to make mortgage payments, the lender may take legal action to repossess the property.

Government Programs
In Canada, programs like the Canada Mortgage and Housing Corporation (CMHC) help make homeownership more accessible by providing mortgage insurance and support for affordable housing.

Market Trends
Economic conditions, interest rate trends, and real estate market conditions can influence mortgage rates and availability.

*Professional Advice
Many individuals seek guidance from mortgage brokers, financial advisors, and real estate professionals to navigate the mortgage process.

Understanding these aspects is crucial when considering homeownership. It’s recommended to thoroughly research and, if needed, seek professional advice to make informed decisions about mortgages.