Understanding Mortgages – What Is a Mortgage?


When someone buys property in Canada, they most often take out a mortgage. This means that a buyer will borrow money, a mortgage, and use the property as collateral. The buyer will contact a mortgage broker or agent employed by a mortgage brokerage. A mortgage broker or agent will find a lender willing to lend the mortgage to the buyer.

The mortgage lender is often an institution such as a bank, credit union, trust company, credit union, finance company, insurance company, or pension fund. Individuals occasionally lend money to borrowers for mortgages. The lender of a mortgage will receive monthly interest payments and will retain a lien on the property as security that the loan will be repaid. The borrower will receive the mortgage loan and use the money to purchase the property and receive the ownership rights to the property. When the mortgage is paid in full, the lien is waived. If the borrower does not pay off the mortgage, the lender can take possession of the property.

Mortgage payments are grouped together to include the amount borrowed (principal) and borrowing costs (interest). The amount of interest a borrower pays depends on three things: the amount borrowed; the interest rate on the mortgage; and the amortization period or the time it takes the borrower to pay off the mortgage.

The length of an amortization period depends on how much the borrower can afford to pay each month. The borrower will pay less interest if the amortization rate is lower. A typical amortization period lasts 25 years and can be changed when the mortgage is renewed. Most borrowers choose to renew their mortgage every five years.

Mortgages are repaid on a regular schedule and are generally “one-off” or the same with each payment. Most borrowers choose to make monthly payments, but some choose to make weekly or bi-monthly payments. Sometimes mortgage payments include property taxes which are passed to the municipality on behalf of the borrower by the company collecting the payments. This can be arranged during the initial mortgage negotiations.

In typical mortgage situations, the down payment on a house is at least 20% of the purchase price, with the mortgage not exceeding 80% of the appraised value of the house.

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A high ratio mortgage occurs when the borrower’s down payment on a house is less than 20%.

Canadian law requires lenders to purchase mortgage default insurance from the Canada Mortgage and Housing Corporation (CMHC). This is to protect the lender if the borrower defaults on the mortgage. The cost of this insurance is usually passed on to the borrower and can be paid in one lump sum when the home is purchased or added to the principal amount of the mortgage. Mortgage default insurance is not the same as mortgage life insurance, which pays off a mortgage in full if the borrower or their spouse dies.

First-time homebuyers will often apply for mortgage pre-approval from a potential lender for a predetermined mortgage amount. Pre-approval assures the lender that the borrower can pay off the mortgage without defaulting. To receive the pre-approval, the lender will perform a credit check on the borrower; request a list of the borrower’s assets and liabilities; and request personal information such as current job, salary, marital status and number of dependents. A pre-approval agreement can set a specific interest rate for the duration of 60 to 90 days of pre-approval of the mortgage.

There are other ways for a borrower to get a mortgage. Sometimes a buyer chooses to take over the mortgage from the seller, which is called “assumption of an existing mortgage”. By assuming an existing mortgage, the borrower benefits by saving money on attorney and appraisal fees, will not have to arrange new financing, and can earn an interest rate well below mortgage rates. interest available in the current market. Another option is for the seller to lend the money or provide a portion of the mortgage financing to the buyer to purchase the house. This is called a supplier repossession mortgage. A supplier’s repossession mortgage is sometimes offered at rates lower than bank rates.

After a borrower has obtained a mortgage they have the option of taking on a second mortgage if more money is needed. A second mortgage is usually from a different lender and is often perceived by the lender to be higher risk. Because of this, a second mortgage usually has a shorter amortization period and a much higher interest rate.

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