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Mark & Vivian DeBruyn-Smith, Sales Reps.
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Mortgages Explained

Royal LePage State Realty, Brokerage
905.525.3737 Bus. / 905.570.2500 Cell
mark@instantpage.org and vivian@instantpage.org

Mortgage Formats Mortgage Features Amortization Term

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:

  1. 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.
  2. 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 1.00% to 3.25%, 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: 1.00% premium due on the mortgage value.
If the mortgage is 80% to 85% of the purchase price: 1.75% premium due on the mortgage value.
If the mortgage is 85% to 90% of the purchase price: 2.00% premium due on the mortgage value.
If the mortgage is 90% to 95% of the purchase price: 3.25% premium due on the mortgage value.

This insurance premium may be either paid up front or added to the mortgage. If added to the mortgage, a $150,000 mortgage with a 5% down payment would translate into a $154,875 mortgage ($150,000 mortgage + 3.25% insurance premium). The extra insurance premium increases the mortgage payment by about $30 per month at a 6% interest rate.

There are additional criteria to be considered when applying for a high-ratio mortgage such as minimum loan terms allowed, maximum amortization periods, allowable purchasers' debt levels, source of the down-payment if less than 10%, use of the property (single family/duplex/investment), plus many more. There is even a maximum purchase price allowed with a 5% down payment. It can range from $125,000 to $250,000 and depends on which Canadian City you are purchasing in. Feel free to ask your REALTOR or mortgage lender for a more in-depth explanation, or visit the large and detailed Canada Mortgage and Housing Corporation site.

There is a 3rd type of mortgage: a Pre-Approved mortgage.
A pre-approved mortgage is not actually a mortgage at all. It is the preliminary approval by the lender of the borrower's application for a mortgage. It usually sets out the maximum mortgage amount allowed, with an interest rate guarantee for 30 to 60 days. This approval is subject to a satisfactory appraisal of the subject property and a credit review of the buyer so it is highly advisable to make any offer to purchase conditional upon financing.

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Mortgage features:

Lenders constantly add additional features and incentives to their mortgage products to attract business in what is a highly competitive market. You should look for the mortgage that best suits both your cash flow and your personal long-term goals. There are many types of mortgage payment structures available, offering both flexible monthly payments and pre-payment options that can save you significant amounts of money over the long term. It is definitely worth looking into your options before signing up.

Most mortgages are very similar to one another and have common features such as...

  • They are portable:
    You can sell your home and move the mortgage to another property without breaking it and having to pay a penalty. This feature is very attractive if your mortgage has a good interest rate and you want to take it with you to your new home.
  • They are assumable:
    The new purchaser can take over your mortgage and assume the payments. Usually the lender's approval is required before this is allowed.
  • They have pre-payment privileges:
    Such as up to 10% extra payment against the principle on the yearly anniversary date or monthly double-up payments. All prepayments are deducted from the principal amount owing and do not go toward accrued interest.
  • Automatic renewal privileges:
    You don't need to re-qualify financially when the mortgage term is up in order to renew the mortgage. This could be very important if your financial situation changed or if your debt load increased and you don't re-qualify under current rules.
  • Allow weekly, bi-weekly or monthly payments:
    By switching your payment schedule from monthly to weekly or biweekly you are able to shorten the mortgage amortization period and save a substantial amount on interest payments.

Comparison chart of Monthly vs. Biweekly vs. Weekly mortgage payments
(All calculations are based on a $100,000 mortgage with a 7% interest rate amortized over a 25 year period)
Payment Schedule Each Payment Total Interest Interest Savings Loan Paid Off In
monthly payments (12 per year) $700.00 $110,120.00 none 25 years
biweekly payments (26 per year) $350.00 $87,150.00 $22,970.00 20.57 years
weekly payments (52 per year) $175.00 $86,880.00 $23,240.00 20.53 years
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Amortization of a mortgage:

The amortization of a mortgage refers to the total number of years required to pay back the entire amount borrowed. While the most common (and maximum) amortization period is 25 years, you can accelerate it to a shorter period of time in order to save on interest charges as long as you are comfortable with the larger payments.

Comparison chart of amount of interest paid over various amortization periods
(All calculations are based on equal monthly payments being paid on a $100,000 mortgage with a 7% interest rate)
Amortization Period Monthly Payment Total Payments Total Interest Interest Savings
25 years $700.00 $210,120.00 $110,120.00 none
20 years $770.00 $184,635.00 $84,635.00 $25,485.00
15 years $895.00 $160,785.00 $60,785.00 $49,335.00
10 years $1,155.00 $138,715.00 $38,715.00 $71,405.00
Term of a mortgage:

The term of a mortgage refers to the number of months or years that the lender and borrower commit to one another at the quoted interest rate and agreed-upon mortgage features. It differs from the amortization period in that mortgage terms usually range from 6 months to 5 years, while it may require a 25-year amortization period to pay back the entire borrowed amount. Each time a term is up, you must either renew for another term with your current lender at the new rates or find a different lender.
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©Copyright 1999 - 2016. Mark DeBruyn-Smith.

Mark DeBruyn-Smith B.A., Salesperson / Vivian DeBruyn-Smith Hons. B.A., Broker
Royal LePage State Realty, Brokerage
905.525.3737 Bus / 905.570.2500 Cell
1122 Wilson St. W., Ancaster - 987 Rymal Rd. E., Hamilton - 115 Hwy#8, Stoney Creek
www.royallepagestate.ca / www.hamiltonhomes.ca

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Royal LePage State Realty, Brokerage - 1122 Wilson St. W., Ancaster Ontario Canada - 905.525.3737 office, 905.570.2500 cell www.royallepagestate.ca
Real Estate Sales – Homes for Sale. Listing and selling homes in Hamilton, Ancaster, Dundas, Burlington, Flamborough and surrounding areas. Residential, Rural and Condominiums. Over 25 years of experience helping clients and friends buy, sell, mortgage, inspect, stage and renovate properties.