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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. |
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| 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 one-time 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.
