I have put together some basic information on mortgage terminology, mortgage costs and some tips on how to make an informed decision on your mortgage needs. While this is not an all-inclusive list, I hope it will help you find the right mortgage for your needs.
A mortgage is amortized over a period of years. This amortization period is the length of time it takes to pay off the mortgage in full. The traditional amortization period is 25 years and is the longest available for a high ratio mortgage (20% equity or less). However, this can be accelerated to pay off the mortgage more quickly, or in some cases can be stretched to 35 years if conventional (20% or more equity) to reduce the monthly payment and help with qualification.
Some mortgages are assumable with qualification. This means that should you sell your house before the term of the mortgage is completed, the purchaser can take over your mortgage if they qualify. This allows you to avoid paying a penalty to break your mortgage.
Blend & Increase:
The ability to increase your existing mortgage or the term of the mortgage, with only the increased amount or term at today’s interest rate. The interest rate for the existing mortgage is combined or blended with the interest rate of the increased amount. This is advantageous if you have a good rate on your existing mortgage or if you want to avoid a penalty to pay out an existing mortgage.
This is the document that the lender will confirm the basic terms and conditions upon which the lender will provide the mortgage and indicate the conditions that must be met before funding. The standard conditions include, but are not limited to, receipt of an appraisal, income verification by way of employment letters, paystubs and income tax returns, as well as downpayment verification.
If you purchase a condo or townhouse you will have to pay a monthly fee that goes towards the maintenance of the building and it’s grounds. In Alberta this fee is called a condo fee, in other provinces it could be referred to as a strata fee or a maintenance fee.
For reasons, planned or unplanned, the borrower may need to sell before the end of the mortgage term. Discharge fees vary widely between lenders which may result in thousands of dollars in penalties. This information will be indicated on your commitment letter and/or the legal mortgage documents signed with the lawyer.
Early Pay-out Penalty:
Many people don’t think about breaking their mortgage when they are in the midst of arranging it, however, this possibility cannot be overlooked. An individual’s circumstances can change – transfer of employment, marriage breakdown, etc. Some mortgages are fully closed and cannot be broken under any circumstance. Other mortgages have a sales clause allowing for early payout of the mortgage upon an arms-length sale of the property, subject to a penalty (for example, three months interest). Some mortgages allow the borrower to break the mortgage, for any reason, upon payment of a penalty.
Home Equity Line of Credit, or HELOC:
This is another option for financing other than a traditional mortgage that gives more flexibility in most cases. The HELOC can offer interest only payments, and an open term. As with any other line of credit, it allows you to re-use the equity that has been paid off again and again. Often the HELOC is offered at prime rate. We can discuss the details together and determine if this is a good option for you.
Interest Adjustment Date:
This may apply to mortgages that close on any day other than the requested day of payment. For instance: since some lenders want monthly payments to be made on the first day of the month, they will adjust the interest due on closing so that interest on your mortgage is paid up until the first of the coming month. If you close on the 20th of the month (and the month has 30 days), you will have to pay interest for 10 days so that you are paid up until the first of the coming month. Then your first full mortgage payment will be due on the first of the following month.
The rate of interest is an important variable when arranging your mortgage. The interest is the payment to the lender for the use of the mortgage money. The interest rate can be fixed (where the rate remains constant for the term) or floating (where the rate changes at regular intervals). Short term or convertible terms sometimes have lower interest rates and can be used to a borrower’s advantage in an unstable market. These mortgages allow you to ride out a fluctuating or falling rate market until rates reach a level where you wish to "lock-in" to a longer term. On the other hand, long term rates offer stability and eliminate the need to monitor rates daily.
When the purchase of your new home closes in 60 days, for example, but the sale of your current home closes in 90 days, you will need interim or bridge financing. This is because for 30 days, you will own both properties, and of course, not receive the equity out of your old property. If the lender you choose cannot provide you with interim financing, you may find getting it from other lenders will be very expensive.
A contract between a borrower and a lender, where the borrower pledges a property to a creditor as security for the payment of a debt. "Charge" is another word for mortgage.
Mortgage Life Insurance:
Life insurance that pays off the balance of the mortgage in the case of the borrowers death (i.e., if a spouse dies, the remaining spouse would not have to worry about mortgage payments – it would be paid in full).
Payment frequency options:
You will often have the choice of making payments on your mortgage on a monthly, semi-monthly, bi-weekly or weekly basis. Increasing the payment frequency, i.e., bi-weekly instead of monthly, can shorten the amortization of your mortgage and save you a considerable amount of interest.
In this computer age, mortgage payments are normally made by pre-authorized chequing or debit where the lender takes your regular monthly, semi-monthly, bi-weekly, or weekly payment out of a predetermined bank account automatically.
These prepayment privileges allow you to make extra lump sum payments, double your payments or increase your regular payments. Prepayment privileges vary from lender to lender. If you want to be able to pay your mortgage off quickly, check the flexibility of your prepayment privileges.
Property Purchase Tax:
In BC there is a provincial tax that is charged to buyers on the completion date. This is included in the lawyer’s Statement of Adjustments. It is typically calculated as 1% of the first $200,000 of the purchase price, and 2% on the balance. First time buyers may have this tax waived partially or in full within certain guidelines and maximum purchase price. Please check with your lawyer to confirm the amount of the tax, or to confirm if it will be waived based on your circumstances.
If you have a good mortgage rate and a number of years remaining on your term, you may want to take your mortgage with you to a new home when you move. This can be done if the mortgage is portable. The property you are moving to will have to be reviewed and approved by the lender before you can "move" the mortgage to the new property.
The period of time, prior to closing of your house purchase ("the completion date") that a lender will guarantee that the interest rate they have offered will not rise. This is usually for a period between 60 and 120 days. The commitment letter will also state under what conditions (if any) that they will decrease the interest rate if and when rates in general drop prior to your completion date.
Standard mortgage fees:
All mortgages have standard fees associated with them such as renewal fees, discharge fees, NSF fees, etc.. These vary from lender to lender and should be considered.
If you purchase a condo or townhouse you will have to pay a monthly fee that goes towards the maintenance of the building and it’s grounds. In BC this fee is called a strata fee, in other provinces it could be referred to as a condo fee, or a maintenance fee.
When property taxes are included with your mortgage payments, your lender will hold back funds from your mortgage proceeds to cover interim or final property taxes payable to the municipality. The amount depends on the month the mortgage was funded and on the dates when interim and final taxes are due. Holdbacks are used to pay for the current year’s taxes, while your monthly tax installments are accumulated in the account to pay for the next year’s taxes.
This is the period of time that the interest rate and the loan is contracted for. Terms can vary from 6 months to 25 years.