Understanding the terminology used in mortgages
About to buy your first property? You’ll soon be talking about mortgages with financial advisers from various banks. Here’s a glossary to familiarize you with the terms and conditions you’ll be negotiating in your mortgage contract.
The mortgage is a loan that’s secured by an immovable and that’s granted by a financial institution (the creditor) to buy a home. You should know that if you don’t make your monthly payments, this institution can seize your property and sell it in order to recoup its money.
The mortgage may be “open” (meaning you can pay it back without penalty) or “closed” (all the payment dates are predetermined and there may be a penalty for paying off the mortgage early).
A down payment of at least 5% is required to buy a home. So, if you want to buy a house valued at $300,000, you must pay down a minimum amount of $15,000, which comes from your personal savings. In this example, you would then be asking for a mortgage of $285,000 to cover the rest of your investment.
People buying their first home can participate in the Home Buyers’ Plan (HBP) to pay the down payment. This is a government program that allows buyers to withdraw an amount from their Registered Retirement Savings Plan (RRSP) without having to pay taxes on the withdrawal.
First-Time Home Buyer Incentive
The Government of Canada is also offering a brand-new program to improve access to home ownership. The First-Time Home Buyer Incentive is an interest-free loan that must only be paid back after 25 years or if the property is resold. This amount reduces the mortgage payments for new homeowners.
Mortgage loan insurance
Unless the down payment is for at least 20% of the purchase price, the mortgage loan must be insured by the Canada Mortgage and Housing Corporation, Genworth or Canada Guaranty. This insurance protects the lender in the event that you are unable to make your mortgage payments. It is separate from home insurance, and it may be paid at the time the property is purchased or included in the mortgage payments.
The premium you’ll have to pay depends on the amount of the down payment and the remaining loan, but it generally varies between 0.5% to 2.9% of the amount borrowed.
In a sense, the interest rate is the price you pay to the bank for giving you the loan. It’s expressed as a percentage, fixed or variable, and can differ from one financial institution to the next. This interest rate is added to the total amount of the loan and is included in the monthly mortgage payments.
Amortization is the amount of time over which the loan will be paid back. The maximum amortization period is set at 25 years.
The mortgage term is the duration of the contract binding the buyer and the financial institution. Normally, the term is much shorter than the amortization period, and it generally varies between six months and five years.
If you want to change the conditions of the contract before its term, there will likely be a penalty. However, these conditions can be negotiated when the contract is being renewed. However, if the owner wants to increase the loan or extend the amortization period, this will more likely involve refinancing the mortgage.
Lastly, before even looking for your dream home and asking for a mortgage, you should know what your borrowing capacity is. This is known as mortgage prequalification. This process guarantees you a given interest rate for a pre-determined amount of time, and it is often required by buyers before you visit their property.