General FAQ
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What is Amortization?
The amortization is the length of time it takes to pay off a mortgage, assuming that the interest rate and payment amount do not change, that all payments are made on time and that no additional payments are made.
In Canada, typically, the longest amortization period is 25 years, although some institutions may allow a longer period. It is to your advantage, however, to choose the shortest amortization period that you can afford. This will save you thousands of dollars in interest in the long run.
What is a Term?
The amortization of a mortgage is divided up into smaller time periods called "terms". Mortgage terms usually range from six months to five years, but some institutions will offer seven- or 10-year terms. The term is the period of time during which, with fixed-rate mortgages, the interest rate and payment amount are fixed. With variable-rate mortgages, the payment amount may, or may not, change; you should review your agreement to check when the payment amount may change. At the end of the term, you can renew your mortgage for a new term, at prevailing interest rates.
Generally, the longer the term, the higher the interest rate. Because it is not possible to know what the interest rates will be over any given period of time, many consumers seeking certainty choose a longer term with a fixed interest rate so that they know in advance, at least for a specified period, how much they will have to pay for their mortgage. This helps them to plan their finances better and enhances their feeling of security. However, during periods when interest rates are expected to fall, many consumers choose variable-rate mortgages so they can take advantage of lower rates without renegotiating their mortgage.
What is a Fixed Rate (Closed) Mortgage?
With a fixed-rate mortgage you benefit from the security of locking in your mortgage interest rate for a predetermined length of time, usually ranging from six months to five years. Other terms such as three months, or six, seven and 10 years are also available.
If you think interest rates will increase, you may want to choose a longer term, such as a five-year term.
If you think that rates are going to decrease or remain relatively stable for a long period of time, you may want to choose a shorter term.Most lenders will allow you to make additional payments on your mortgage without any penalty. These could amount to as much as 25 per cent of your original mortgage amount (depending on the institution). However, if you want to pay more than the annual allowable maximum, or pay off the entire mortgage at any time, you will generally have to pay a penalty. Make sure you understand this before choosing your term.
What is an Open Mortgage?
An open mortgage allows you to pay off part of your mortgage, or the entire mortgage, at any time without any penalty. Open mortgages usually have a short term, ranging from six months to one year. The interest rate is usually higher than the fixed rate for a closed mortgage with a similar term. One situation where an open mortgage may be appropriate is if your house is for sale and you want to repay the financial institution with the money you get from the sale.
What is Variable Interest Rate Mortgage?
At the start of a variable interest-rate mortgage, the lender will calculate a mortgage payment that includes both the principal and interest. During the term of the mortgage, your payments usually do not change. However, as the base rate for the variable interest-rate mortgage changes, so will the interest rate on your mortgage.
If interest rates drop, less of each payment will go towards paying interest and more will go towards paying off the principal. If interest rates rise, more of your payment will go towards paying interest and less will go to reducing the principal.
Some variable-rate mortgages are completely open (you can pay off all or part of your mortgage at any time, without a penalty). Others may be closed and charge a penalty for paying off all or part of the mortgage.
What is a Convertibility Feature?
A mortgage with a convertible feature allows you to renegotiate your interest rate (renew it early) before the maturity date. However, not all lending institutions offer a convertibility feature. With a convertible rate mortgage, you can lock into a longer term during the current term of your mortgage without paying a penalty but only if you stay with the same lender. For example, if after a couple of months you see that interest rates are going to increase, you may change to a longer-term mortgage such as a five-year term. The convertibility feature is often on variable interest-rate mortgages or fixed-rate mortgages with short terms.
What is an Adjustable Rate Mortgage?
An adjustable-rate mortgage is a mortgage where the interest rate and payment amount are adjustable from time to time during the term.
What is a Down Payment?
The down payment is the amount of money that you pay upfront towards the purchase of your home. You should have a good idea of how much you can put towards the down payment before talking to a potential lender or broker.
The minimum down payment for the purchase of a home depends on many factors (geographic location, the type of house, its cost, etc).
Normally, the minimum down payment required for the purchase of a single home or condominium is five per cent of the accepted purchase price (or appraised value, whichever is lower). Usually, for the purchase of a 2-unit home (duplex), the minimum down payment is 7.5 per cent, and for a 3-unit home (triplex) or 4-unit home, 10 per cent. However, the less you need to borrow, the less interest you will have to pay.
If your down payment is less than 25 per cent, your mortgage is considered a "high-ratio" mortgage. In this case, the mortgage lender must, by law, require you to purchase mortgage loan insurance (or "default insurance"). If your down payment is 25 per cent or more, your mortgage is considered a "conventional" mortgage and does not, by law, have to be insured. However, a lending institution may still require mortgage default insurance for a high-risk loan, despite the fact that the law does not require it.
Normally, the down payment you make must come from your own funds. If you borrow the money (such as on a line of credit, personal loan or credit card), a higher mortgage loan insurance premium applies.
What is Mortgage Loan Insurance?
High-ratio mortgages (mortgages with less than 20 per cent down payment) must, by law, be insured against default. This type of insurance is offered by the federal government through the Canada Mortgage and Housing Corporation (CMHC) or through an approved private insurer (such as GE Capital Mortgage Insurance Canada). With mortgage loan insurance, if you default on your mortgage, the lender is paid back by the insurer.
It should be noted that mortgage loan insurance protects the lending institution only. If you default on your mortgage and the proceeds from the sale of your house are not sufficient to pay the outstanding balance on your mortgage, the lending institution will be covered by mortgage loan insurance. Note that, in such a case, you would still lose your house.
Before approving you for mortgage insurance, the mortgage insurer generally makes an assessment of your credit and may require you to pay an application or appraisal fee to process your file and confirm the approval of the mortgage. This fee covers the insurer's costs associated for that assessment. In some cases, the lending institution may pay this fee.
Normally, the down payment you make must come from your own funds. If you borrow the money (such as on a line of credit, personal loan or credit card), a higher mortgage loan insurance premium applies (see the following table.
The mortgage loan insurance premium may be paid in cash or added to your mortgage. Although the second option seems interesting, remember that it is more costly, since you would have to pay interest charges on the amount of the premium.
Conventional mortgages (mortgages with at least a 20 per cent down payment) do not, by law, have to be insured. However, there may be instances where mortgage insurance will be required if your loan is considered risky. In this case, some lenders may charge a premium of 0.65 per cent if your down payment is between 20 and 34.99 per cent or 0.5 per cent if your down payment is above 35 per cent (rates effective July 2003.
What is a Credit Rating?
When you apply for a mortgage, the lender checks to see whether it should lend you the money, and under what conditions.
The lender will ask your permission to obtain a copy of your credit bureau report. This report shows your previous and current credit rating and indicates how well (or not) you handle credit. If you do not handle credit well, you may be charged a higher rate, or your application may be denied depending on the financial institution.
If you consistently make late payments, or if you do not pay your bills at all, the lender could refuse your mortgage application. Some lenders may still consider your application if you have a large down payment and an acceptable co-signer.
If you have previously declared bankruptcy, this will show up on your credit bureau record for a minimum of six years after your discharge. While some lenders will not consider your request if a Discharge of Bankruptcy is recorded on your credit bureau report, others may consider the request based on your current circumstances and amount of down payment.
You should request a copy of your credit file at least once a year. This is also important before you apply for a mortgage, to make sure that there are no mistakes on your credit report. This service is usually provided free of charge. To request your credit report, contact the following credit-reporting agencies:
Equifax Canada Inc. Consumer Relations Department:
Box 190,
Jean Talon Station
Montreal, QC H1S 2Z2
Tel: (514) 493-2314 or toll-free: 1-800-465-7166
Fax: (514) 355-8502
Web site: www.equifax.ca
Trans Union Canada Consumer Relations:
Box 338,
LCD 1
Hamilton, ON L8L 7W2
Tel: (905) 525-0262 or toll-free: 1-800-663-9980
Fax: (905) 527-0401
Web site: www.tuc.ca
