Buying a home is one of the biggest decisions (and the most important investments) in a consumer’s life. That’s why it’s crucial to master the mortgage vocabulary. This way, you can choose the mortgage product that is right for you, knowingly.
Not all buyers are at the same stage in their lives. Funding requirements differ from person to person, which explains the range of products available. The best way to navigate is to talk to a mortgage expert. They can advise you and find a solution that is appropriate for your situation, with which you will feel comfortable.
First, ask your financial institution to pre-approve the amount you can borrow. This will let you know which properties are at your fingertips. As a general rule, pre-approval is guaranteed 90 days. And to reassure the lender, find a co-signer, that is, a third party who signs the mortgage documents with the borrower, but who has no personal interest in the property.
WHAT IS A MORTGAGE?
Few people can afford to pay their home completely for purchase. A mortgage is a loan that covers the amount of money required to finance the purchase of a home. It, therefore, allows someone to buy a property without paying the full purchase price at once. The mortgagee is the one who borrows the sum, while the mortgagee is the one who lends it.
The purchase price of your home minus the amount of the mortgage you have negotiated gives the down payment, that is, the amount you will have to pay on the purchase. This down payment is required in almost all cases. In addition, as with all other loans, the mortgagee must repay the loan with interest. There are various repayment methods that are at the origin of the range of mortgages offered.
It is a loan; it is therefore repaid in periodic installments. These have two amounts: one pays back some of the principal (the amount of money borrowed), while the other pays the interest (the costs incurred because you borrowed money).
The higher your down payment, the less money you will have to borrow and less interest you will have to pay for the term of the mortgage.
If your down payment is 20% or more of the purchase price, you will have a regular mortgage.
If your down payment is less than 20% of the purchase price, you will have a high-proportion loan. This must be insured in order to protect the lender. This coverage is mortgage loan insurance. It protects the lender from default by the borrower.
Canada Mortgage and Housing Corporation (CMHC), Genworth Financial and AIG United Guaranty are helping first-time homebuyers who do not have the resources to make a down payment. For more information, talk to your mortgage advisor.
The maturity of a mortgage is the length of time the lender lends the borrower the amount used to buy a home. It can range from six months to 10 years, but it is usually between two and five years. In general, the closer the maturity, the lower the interest rate, and the less it costs to borrow the money. When the deadline comes, you will have to repay the balance or renegotiate the loan for another maturity, until you have repaid it in full.
The short-term maturity
Short-term mortgages usually mature two years or less. These offer a lower interest rate than long-term loans. People who think interest rates are higher now than they will later tend to choose the short term. They hope that rates will be lower at the time of renewal.
The long-term maturity
Long-term contracts are due to expire three years or more. They cost a little more than short-term loans, so their rate is higher. Some borrowers are willing to accept this rate in return for greater long-term stability in their spending. It’s easier to budget for a stable mortgage payment; it gains peace of mind.
Full mortgage repayment can be long, 15 to 25 years on average. Fully repaying a loan in installments on principal and interest for a defined period of time is called amortization. In recent years, mortgage lenders and insurers have begun offering consumers amortization periods of 30.35 and even 40 years.
There are a number of ways that can be reimbursed. Some people prefer a pre-defined fixed rate, which allows them to budget and plan other expenses more easily. Others opt for flexibility, in case their situation allows them to make larger payments from time to time. There are mortgages for all types of borrowers. Your mortgage advisor will help you find your way around.
The open mortgage
To make larger payments or repay your loan in full without penalty, you need an open mortgage. It offers all the flexibility you want. The borrower must be prepared to keep up with the fluctuation in interest rates in exchange for the right to repay the loan before maturity.
It should be remembered that most regular mortgages allow the borrower to make lump sum payments of up to 20% of the total loan, once a year, without penalty. This is often referred to as loans with prepayment privileges. This payment is applied directly to the capital. So you don’t necessarily need an open loan (at a higher interest rate) to make additional payments.
The closed mortgage
The closed mortgage commits you for a fixed term, at a fixed interest rate. In most cases, a buyer who wishes to repay the loan in full before the end of the closed maturity will have to pay a penalty.
The interest rate on the closed mortgage does not change over the term of maturity, but neither does the maturity. It is known the amount of the payments and the amount of capital remaining to be repaid at the end of the maturity.
Closed loans usually offer a better interest rate than open loans. Most allow you to make an early repayment per year of value of no more than 15% of the total loan without penalty. This payment is applied directly to the capital.
The convertible mortgage
In a convertible mortgage, the lender and borrower agree at the beginning of the maturity to allow the borrower to change the nature of the loan during the loan. This is ready to choose if you want to start with an open loan before locking it. The convertible loan offers a better rate than the open loan while allowing it to be converted into a closed loan.
The interest rate is the sum of the interest charged on a monthly payment, expressed as a percentage. It is calculated based on the yield on bonds or the rate at which the Bank of Canada lends money to lending institutions. As a general rule, the interest rate is low if you borrow for the short term and higher if the maturity is further away.
If you are trading a fixed-rate mortgage, your rate will remain the same until the end of the maturity. You will not be surprised: your payment will not change, nor will the balance of your loan at the end of the contract.
The variable rate mortgage
Your loan is variable rate if you have agreed that it can fluctuate during maturity. The rate then follows the fluctuations in the financial institution’s base rate from month to month. Even if the interest rate changes, the amount of your payment remains the same, except that the portion applied to the principal will vary. For example, if the rate goes down, more of your payment will be used to repay the principal. Variable-rate lending is an attractive choice if you think interest rates are high right now and are likely to fall.
THE MODALITY OF THE ACCORD
When you agree with the seller on the purchase price of the home, you must pay a down payment. This is a part of your down payment, paid at the signing of the promise to buy and sell.
The sales contract is the official document detailing the price and terms of the transaction. It is approved by the buyer and seller.
When negotiating the price of the house, keep in mind that you will have to pay municipal taxes. These apply to all private properties and are mostly paid monthly or in two annual installments. The amount of taxes is calculated based on the municipal tax rate and the value of the property according to the municipal assessment.
In addition to the down payment and down payment, you may have to pay for the house inspection, i.e. the assessment of the structure and equipment (plumbing, heating, electricity), to determine if the house is safe and if repairs necessary.
Ensuring your mortgage
Your mortgage advisor can tell you about the relevance of life, disability or illness insurance on your loan. There are several options available to protect yourself and your family in case you are unable to work. There are several types of insurance:
Mortgage loan insurance
Mortgage loan insurance allows you to buy a home with a down payment of up to 5%. The amount of the insurance premium depends on the amount borrowed. The premium can be paid in a single lump-sum payment, otherwise, it can be added to mortgages and included in the monthly mortgage payment.
Title insurance protects buyers from the risks inherent in real estate transactions (including title theft) as long as they own their home.
Mortgage insurance (also known as credit life insurance)
Mortgage life insurance is designed to protect your family from the financial burden of paying off the mortgage in the event of your death. It is a life insurance policy that pays off the balance of the mortgage to the lending institution if a person on the mortgage becomes unable to make their payments.
PAY OFF YOUR MORTGAGE IN ADVANCE
How to shorten the length of your loan and reduce the cost of borrowing