Mortgages
A mortgage is a loan that uses a property as security to ensure that the debt is repaid. The borrower is referred to as the mortgagor, the lender as the mortgagee. The actual loan amount is referred to as the principal, and the mortgagor is expected to repay that principal, along with interest, over the repayment period (amortization) of the mortgage. A mortgage can be used for financing many different things, including:
- Purchasing or constructing a new home
- Purchasing an existing home
- Refinancing to consolidate debts
- Financing a renovation
- Financing the purchase of other investments
- Financing the purchase of investment property
Since a mortgage is a fully secured form of financing, the interest you pay is usually less than with most other types of financing. Many people use the equity in their homes to finance the purchase of investments. Using a Secured Line of Credit, or a fixed-rate mortgage, the interest costs are lower, and they can even write off those interest costs against their taxable incomes.
The conventional mortgage is one that is offered on new and existing homes, for up to 75 % of the purchase price. This means that the home buyer must have at least 25 % of the purchase price available for a down payment. Conventional mortgages do not normally have to be insured through CMHC although in most cases an independent appraisal is required to determine the market value of the property.
High ratio financing is a term used by the banks to classify a mortgage on a property where the loan is in excess of 75% of the value of the subject property. This term is commonly known as Loan to Value (LTV).
The banks are limited by the Bank Act where they are not permitted to advance loans beyond 75% of the value of the house. This creates a major problem, as most consumers who do not have at least 25% down payment simply cannot afford to purchase a home. This has further consequences in that if a consumer have to wait until they acquire 25% down payment there would be fewer and fewer buyers as was the case several years ago. In an effort to stimulate the real estate sector the Government created a program whereby a consumer can purchase a home with less than 25% down payment, provided that the mortgage is insured. The insurance company guarantees that if a purchaser defaults on a mortgage that the bank would be guaranteed all their money.
Today there are two companies set up to insure mortgages, Canada Mortgage and Housing (CMHC) and GE Capital. A consumer with as little as 0% down payment can purchase a home by having the mortgage insured by one of these companies. The cost of this insurance varies according to the loan to value and is typically added to the mortgage and amortized over the entire amortization period which is generally 25 years. This way a consumer does not have to come up with the insurance premium at the time of purchase but can defer this cost over a period of time. CMHC and GE set guide lines that the banks must follow when they are processing a mortgage that requires insurance.
These guidelines are very important and cover three basic principles with respect to the borrower's qualification such as income, credit and equity.