Risk? What Risk? Mortgage Investment From the “Buy Side”

Residential mortgages in Canada, compared to various other possible investments, are not usually considered to be particularly risky. And, they’re not. But they do carry more risk than government bonds do and they are therefore priced at a spread above government bonds. What risk is there – particularly with insured mortgages? In terms of credit risk (the risk that some portion of the principal advanced or interest owing may be lost due to borrower default) there is very little. For conventional loans with an LTV of 80%, credit losses would arise only in the event of a “perfect storm” scenario which would include a mortgage default, a steep drop in home values, property tax arrears and delay. This rare scenario could easily erode a lender’s 20% security cushion but investors also consider two other types of risk always associated with mortgages: Reinvestment Risk and Liquidity Risk.

Credit Risk is the risk that that some portion of the principal advanced or interest owing may be lost due to borrower default.

Remember Mary and her government bond? When Mary sold her 10% government bond (and earned an impressive capital gain because rates had decreased from the time she first invested), she decided to consider taking on a little more risk and she looked at investing in a fund of fixed rate residential mortgages. The fund manager explained to her that the fund’s yield would not be constant because amounts of principal are repaid to the fund every day – either through regular amortized borrower payments or full payouts. The fund would then reinvest the repaid principal in new mortgages which could have lower rates than the older repaid mortgages. Mary now understood the concept of Reinvestment Risk. Her bond had paid a constant rate of return until maturity. An investment in mortgages was going to provide a less certain return, but she invested in the fund anyway because she was comfortable that she was being compensated for this risk by the yield she would earn, which includes a spread above the yield of government bonds.
Reinvestment Risk is the risk that the mortgage principal may be repaid prior to maturity (without the appropriate interest penalty) and reinvested at a lower rate.

A couple of years after she invested in the mortgage fund, Mary decided to sell all of her investments and open her own business. Over that two year period, her mortgage fund had performed well but there had been widely reported problems in the American mortgage and housing market which were threatening to spill over into Canada. Mary was not the only investor in the fund wanting to sell and the fund manager was having great difficulty finding new investors as investments which contained the word “mortgage” had fallen out of favour in the market. Mary had come face to face with Liquidity Risk and, although she was able to sell her investment in the mortgage fund and open her own business, it took longer than she had expected – especially compared to how easy and fast it had been to sell her government bond two years earlier.

Liquidity Risk is the risk that, in the event that an investor needs to sell some or all of its mortgage portfolio , it could take some time to find a buyer and to go through the review process and close the transaction.

Mortgages are priced at a spread over government bonds to compensate investors for Credit Risk, Reinvestment Risk and Liquidity Risk. But how big does the spread need to be? Look for the answer in the next edition.

Bonds, Yields and Spreads and how they affect mortgages in "easy to explain" terms.

The Bond Market and Fixed Income Yields - How Does it Really Work?  

The first thing we need to understand about the bond market is the concept of “yield”. The yield of a bond is the income, the earning, the profit – the reason why an investor would invest. With a bond, yield is a function two things: the interest the bond pays and the price the investor pays for the bond. 

Think of this example:

A few years ago, Mary bought a new bond with a face value or principal amount of $100 which pays annual interest of $10. Mary’s yield is 10%. Interest rates in the economy have decreased since Mary bought her bond and, today, a similar new $100 bond only pays annual interest of $5 (a 5% yield). Mary must be happy to have a bond with a yield of 10% when the current yield is now only 5%, right? If Mary decides to sell her bond, she will ask for $200 for it since she knows that investors today are only earning a yield of 5%. Her bond still pays annual interest of $10 to whoever owns it, so the new investor who pays $200 for her bond, will earn a yield of 5%. Bonds pay a fixed rate of interest until they mature. Bond prices, and therefore bond yields, change all the time. 

Have you ever noticed that reporters, when trying to explain the reason why the bond market influences mortgage rates, will often say "because mortgages are financed through the bond market"?  Financed through the bond market? While that statement is not entirely true, it can help us understand the relationship between mortgages rates and the bond market. 

The bond market (and we are referring to Government of Canada bonds) operates on the simple basis of supply and demand. We have all heard, especially recently, about the government's operating deficits and overall debt. When the government takes in less than it spends, it finances the shortfall mostly by issuing bonds (and other short term instruments such as Treasury Bills). Investors buy these bonds when they are first issued but there is also a vast secondary market which allows investors to buy and sell existing government bonds before they mature. As with anything in the economy, increased demand results in higher prices. Higher bond prices result in lower bond yields since the interest rate of each bond is fixed when it is issued (like Mary’s example above). Demand for government bonds tends to increase during times of uncertainty and when investors see increased risk in the stock market - like they probably do now. When the economy recovers and the outlook for corporate earnings brightens, investors tend to return to the stock market. Demand for bonds falls off, bond prices are pushed down and bond yields are pushed up.

Government bond yields are widely followed and are used as a reference point or a benchmark for other fixed rate investments. Government bonds are considered to be the safest and the most liquid (easy and fast to sell if necessary) fixed income investments available in Canada. They therefore provide the lowest returns. Other fixed rate investments are evaluated in comparison to government bonds and, since government bonds return the lowest yields, yields on other investments are always higher. The difference is often referred to as the "spread". Using government bonds as a benchmark therefore provides a base frame of reference for valuation of other fixed rate investments - like mortgages.

From MCAP Mortgages

Found a home with great potential but it needs a little TLC - Purchase Plus Improvements

This product is ideal for consumers looking to purchase a home that has great potential but needs a little TLC. The Purchase Plus Improvements program allows you to make improvements immediately after taking possession of your new home and have the costs rolled into one easy-to-manage mortgage*.  The best part is the mortgage interest rate is not affected....no high interest second mortgages or additional Lines of Credit required.

Acceptable loan purpose

• Purchase transactions
• Single advance if improvements are less than $40,000 or 20% of initial value.
• Multiple advances to a maximum of four,  if improvements exceed $40,000 or 20% of initial value.
• Available for Secondary Homes

Eligible properties

• Maximum four units with at least one unit occupied as the principal residence
• New construction or existing properties

Loan-to-value ratio limits

• One and two units - 95% (includes purchase amount and improvements)
• Three and four units - 90% (includes purchase amount and improvements)
• Lending value is based on the lesser of the improved property value or the sum of the purchase price plus direct costs associated with the improvements*

Amortization options

• LTV > 80%: Up to 30 years
• LTV ≤ 80%: Up to 40 years (not all lenders offer 40 year amortization)

 STEPS TO FOLLOW

• Step 1: Find a house and have a good idea of what renovations need to be done and a rough idea of how much it will cost.
• Step 2: You can get an approval based on the house “as-is”.  You then go and get firm price quotes for the work that needs to be done.  Make sure the quotes specifically state the work that is to be complete.
• Step 3: You will then have your mortgage approval revised to include the price of renovations.
• Step 4: You take possession of your new home and start the renovations. 
• Step 5: The work must be confirmed complete. 
• Step 6: Your lawyer will be instructed by the lender to release the money for the renovations.

It pays to shop around at renewal time!

One finding of a survey by Canada Mortgage and Housing Corp. released last month was that 89% of consumers renewing their mortgage stay with the same financial institution. And 68% stay when they are doing a refinance.

The banks are doing more to retain customers but there is a pretty good chance you won’t get the best deal if you renew automatically.  Most of the time people do some rudimentary research before they go back to their lender. Not so long ago people would just take the renewal letter, sign it and send it back. It still happens but not as much anymore.  The posted rate on a five-year fixed closed mortgage today is 5.39% but clients may get offers in the mail as low as 4.04% in a renewal letter. The problem is a broker could probably get you 3.59% — meaning you just left 45 basis points on the table.

On a $250,000 mortgage at 4.04% paid monthly and amortized over 25 years, the monthly payment would be $1,320.48, with the interest cost during a five-year term at $47,014.79. Chop the rate down to 3.59% and the monthly payment drops to $1,260.09 ,with the interest over the five years falling to $41,658.85.
If you were crazy enough, or lazy enough, to take the posted rate, you would pay $1,510.01 monthly for the same mortgage and your interest cost would jump to $63,201.92.

Let’s just say it pays to shop around. So why don’t more people do it?

It takes time to shop around for a mortgage, so why not use a mortgage broker to do the work for you.  Also there is a perception that it’s difficult to switch banks, plus it will cost you some money to switch. Yes, it’s a minor hassle but for $5,000-plus, count me in. As for the costs, the bank you are switching to will often cover your legal costs. Even if it doesn’t or say you face a discharge fee of $300, that’s small price to pay upfront.  If you change the terms of your mortgage and refinance, it could cost you as much $700 to switch, something you would have to do if you have a home-equity line of credit or have a collateral charge on your mortgage.

If you are switching to a new lender it takes about 3 weeks to process so don't leave it until the last minute.  Also, most lenders offer rate holds between 90 and 120 days so start the process 4 months before your renewal date.  In a rising rate market you could save even more!

Do You Cringe When You Hear The Word "BUDGET"?

Sure, a budget involves a bit of work on your part, but the payoff is financial discipline and peace of mind.  Once you get the hang of it, budgeting is easy and can mean a better financial future for yourself and your loved ones.

What is a budget?

First of all don't cringe at the word, embrace it as it could change your life.  A budget is an excellent money management tool that helps you achieve your financial goals.  It doesn't have to be complicated either...this simple guide will help you make a budget and stick to it.

• If you find money is tight
• If you don't know where your money is going
• If you have problems paying off your debt
• If you don't save regularly
• If you want to find ways to make your dollar stretch further 

Budgeting could be exactly what you need!

A budget helps you see more clearly how much money you receive, and how much you spend and save.  Most people know how much they make.  But do you know where your money is going.  A simple process will help you achieve just that.  Every dollar you spend will have an impact on the overall picture.

Think about your goals!

Before you start making a budget, take some time to think about your financial goals.  Do you need to pay off debt?  Do you want to save to buy a home? Do you want to pay down your mortgage?  Do you want to build your nest egg for retirement?

Creating a budget means looking at your past expenses and creating an improved version that reflects your financial goals.  In a balanced budget, your income exceeds your expenses- therefore you are able to save some money each month towards your financial goals.  Your budget is what will guide your spending in future months and help you save money.

Here is a link to a simple but very effective budgeting worksheet.  START TODAY....IT'S YOUR FUTURE.

Making a Budget and Sticking To It - Worksheet

Getting a Mortgage After Bankrupcty

Sometimes bad things happen to good people.  Canadians who have declared bankruptcy in the past may have difficulty re-establishing their credit in order to obtain mortgage financing.  Many Canadians have been forced into bankruptcy due to divorce, illness, loss of job and other uncontrollable situations.  This doesn't mean that once bankrupt, you cannot obtain a mortgage until the bankruptcy record "falls off" your credit bureau in six years.  It just means that you have to work to re-build your credit before you qualify for mortgage financing.

Here are some tips and steps you should take as soon as you are discharged from bankruptcy:

1.  Send in your letter of discharge, along with the complete list of tradelines that were included in the bankruptcy to both credit reporting agencies in Canada:  TransUnion and Equifax.  This is very important, as often the bankruptcy has not been reported correctly.  The tradelines (credit cards, lines of credit, loans, etc.) that were included in the bankruptcy should have zero balances owing on the credit reports and should be marked "Included in Bankruptcy".  Any reporting errors will slow the credit score rebuilding process.

2.  Check your credit reports to ensure that the bankruptcy has been recorded correctly.

3.  As soon as you are able, apply for a secured credit card that will report to both credit reporting agencies.  If you are married, you can apply for a joint card reporting on both your bureaus.  In Canada, Capital One and HomeTrust Visa offer secured credit cards after a bankruptcy discharge.  The way this works is that you must provide a deposit to the credit card company (best amount is $1,500, but you can start lower and build up to $1,500).  The secured credit card company then issues you a credit card with a limit equal to the deposit (the deposit is kept in an interest bearing GIC held as security against the credit line, but this is not the same as a pre-paid credit card).   Make every payment on time - everytime - no exceptions!  You cannot have any derogatory credit (slow payments, collections, judgements, etc.) on your credit report after bankruptcy, or you will ruin your chances for mortgage financing!

4.  Try to keep the credit outstanding on the new credit line below 70% of your limit to optimize your credit score (example, if you have a credit card with a $1,000 limit, try to keep the balance owing to less than $700.)

5.  If possible, try to establish a second tradeline reporting on your bureau.  You may be fortunate enough to have a relative who would be willing to co-sign a small loan for you.  Sometimes it is a good idea to take out an RRSP loan, and have a strong co-signer - but you must make sure that the loan reports on your credit bureau.

It is possible to get mortgage financing with as little as 12 months re-established credit reporting on your credit reports, providing that the minimum credit limit is at least $1,500.  CMHC will approve mortgage financing with 5-10% down payment if you have a lender who is supporting the mortgage financing, the reason for the bankruptcy was understandable, and all other conditions are "perfect" (job stability, down payment from your own resources, etc.)  Many lenders, however, are looking for 2 years re-established credit and a minimum of two new tradelines reporting.  Some "A" lenders will decline mortgage financing if there is a bankruptcy on record, so it is important to consult an Accredited Mortgage Professional to help you select a lender willing to work with previously bankrupt mortgage applications.  If you have not re-established new credit, your credit score will be frozen at the score reported on your bankruptcy discharge - likely well below the minimum credit score of 600 required for mortgage financing.  So re-establishing credit is the most important thing you can do to get back on track.

There are alternative and private lenders who will finance previously bankrupt individuals who have not re-established credit, but the interest rates and down payment required will be substantially higher.

As an Accredited Mortgage Professional,  I would be able to assist you with advice on how to re-establish your credit and find a lender who would be willing to support your mortgage application. 

Things To Ask When Buying A Cottage

By Mark Weisleder | Fri May 27 2011 MoneyVille.ca

Buying a house in the city or suburbs can be complicated enough, but buying a cottage or vacation property outside of town requires even more due diligence.
In town, you probably wouldn’t ask if the water coming out of the tap is drinkable. Nor would you wonder if the plumbing was hooked up to the sanitary sewer. But these are exactly the sorts of questions you should ask when buying a cottage, plus a few more.
1. Get an inspection: Cottages are usually occasional residences and so may not be as properly maintained as they should be. This is why every purchase should be conditional a satisfactory professional home inspection. If the cottage has a wood-burning stove or fireplace, then a certificate must be requested from a Wood Energy Technical Transfer specialist, to confirm that the system was installed and is operating correctly.
2. Is the water drinkable? There are two areas of potential concern when it comes to water – the quantity and quality. Is there enough to satisfy family needs and is it good enough to pass the local health department requirements.
Ask the sellers for these things:
• A potability certificate from the local health authority, confirming the water is safe to drink;
• Confirmation that the well, the pump and related equipment have performed adequately during the Seller’s occupancy;
• Confirmation that there is an adequate rate of flow for normal household use;
• Provision of a well driller’s certificate, if available; and
• The location of the well.
A separate inspection may be needed by a well specialist. If nothing else it gives you an idea of what it would cost to replace the well if it fails.
3. How’s the septic system? Septic systems present their own difficulties because it is usually difficult to tell during an inspection how long the system may last. The replacement cost can be up to $20,000, especially if there are stringent environmental regulations in effect in your area.
Buyers should ask for confirmation that:
• The system was installed with all necessary permits;
• The system has been adequately maintained;
• The seller is not aware of any malfunctions;
• The seller will provide copies of any inspection or approval reports in their possession;
• The seller agrees to pump out the tank at their expense prior to closing; and
• There are no work orders on file with the Ministry of the Environment or the local municipality.
The buyer should arrange for their own separate inspection of the system itself.
4. What’s the road allowance? Even if your cottage fronts on water, this does not give you ownership of the land up to the lake. The first 66 feet fronting onto the lake is typically owned by the local municipality and is referred to as the shore road allowance.
Although you have access to the water, you can’t stop others from using it. Nor can you build anything on that 66-foot piece of land. Many cottagers have found out afterwards that either all or part of their cottage was built on land that they do not own.
You may be able to buy the land from the municipality, but it is a process. If you can get an up to date survey from the seller, this should answer your questions. Also inquire to make sure that any required permits were obtained to build a dock or boathouse, as there is no automatic right to do this. In all cases, make sure you have title insurance, which should assist with most of these types of issues.
5. Access to the cottage: If you do not have year round access by a city road, then you must ask how you get from the road to your property. If it is a private right of way over a neighbour’s land, you must understand the terms of this agreement to ensure it is year round access and it is clear who is responsible for maintaining the road.
If there is no registered right of way, it can be a nightmare, with owners fighting over who has the right of way and who owns it.
For all of these reasons, it is recommended that buyers work with a local real estate agent who should be familiar not only with each of these issues, but more importantly, will be able to recommend the professional inspectors and town officials who can satisfy a buyer’s concerns.
By being properly prepared before buying a cottage, you will avoid unwelcome surprises after closing.

Mortgage Terms you need to know!

Accelerated Payment Frequency

A schedule of weekly or bi-weekly payments that allows you to pay more towards your principal, reducing the amount of interest you pay and the life of your mortgage. The accelerated weekly payment is determined by dividing the monthly payment by four, and the accelerated bi-weekly payment is determined by dividing the monthly payment by two.

For example, if the regular monthly payment for your mortgage is $1,000, you will pay $12,000 a year in mortgage payments. But if you choose an accelerated weekly payment schedule, you will pay $250 per week (one quarter of the monthly payment of $1000), for a total of $13,000 (52 x $250). That's an additional $1,000 that will be applied towards the principal of your mortgage. The faster you pay your loan, the less interest you pay overall.

 

Amortization Period

The amount of time it would take to repay a loan in full based on the payment amount at the selected payment frequency and current interest rate. You may choose mortgage amortizations from 1 to 35 years for conventional mortgages and 1 to 30 years for high ratio mortgages. Remember: the longer the amortization, the less each payment will be but the more interest you will pay overall.

 

Anti Money Laundering Legislation

Federal Anti-Money Laundering Legislation requires us to ask you what your intended use of this account is.

 

Annual Family Income Before Tax

Your Annual Family Income Before Tax is the total salary, and commissions, before deductions by all household members who are applicants for the mortgage.

If you are a regular salary earner, you should base your income on your gross annual income before taxes not including bonuses.

If you are a commission based earner or self-employed, you should base your income on an average of your last three years Notice of Assessments from Canada Revenue.

 

Annual Property Taxes

Property taxes vary for each property and are dependent on the city's property tax rate and the assessed property value. You can usually find the property taxes for a particular property on the MLS listing or you can ask your real-estate agent, builder, or local municipality.

 

Appraised Value

The market value of your home, as determined by a certified appraiser.

 

Annual Percentage Rate (APR)

The APR expresses the cost of borrowing that you pay to get a loan, including interest and other applicable costs required by the lender (such as appraisal fees) as an annual rate on the principal amount.

 

Assets

Goods of value that you own. This can include investments, cash, property, vehicles and other assets. However, most lenders do not include certain assets, such as furniture, jewellery, or antique pieces, when determining the net worth of a loan applicant.

 

Assignable Mortgage (Transferable)

A mortgage that may be transferred to a new lender from another financial institution.

To be considered assignable, the mortgage cannot be collateral or privately held and must have the same individuals on the application as on the current mortgage. The most common collateral mortgages are revolving lines of credit that are secured against your home.

 

Assumable Mortgage

A mortgage that can be taken over by another person who buys your home.  Mortgages are assumable, as long as the person taking over the loan meets usual credit criteria.

 

Blended Rate

An interest rate determined by averaging out two different interest rates, usually your current rate used to calculate your payment and today's rate, taking into account the remaining term of your current mortgage.

 

Breaking A Mortgage

Your mortgage payments are set according to the interest rate charged for the term or period of time you will be making those payments. Should you wish to get out of these payments, you would be "breaking" the terms of your mortgage agreement, and could incur interest penalties in doing so.

 

Closed Mortgage

A mortgage that cannot be repaid before maturity.  Mortgages cannot be repaid before maturity without charge, which is typically three months interest or the prepayment interest rate differential amount, whichever is greater. However, borrowers may be able to make prepayments within their annual prepayment option of the original principal amount.

 

Closing Date

The day a transaction is completed and usually when money changes hands. When buying a property, the closing date is the day when the seller transfers ownership to the buyer. When getting a loan, the closing date is the day money is transferred from the lender to the borrower.

 

Co-Borrower

A person whose name does not appear first on the Mortgage or Credit Account documents but has the same rights and obligations as the Primary Borrower. There can be multiple Co-Borrowers (guarantors are not Co-Borrowers).

 

Condo Fees

Condo fees vary depending on your property size and your condo maintenance requirements. To get an estimate, consult the property manager for the condo you are looking to buy, your real-estate agent, or builder. The ongoing maintenance fees charged by the condominium board can affect the amount of mortgage you can qualify for.

 

Conventional Mortgage

A mortgage loan for an amount up to 80% of the value of the property.

 

Convertible Mortgage

Variable rate mortgages may be converted at any time and without charge into a fixed rate mortgage with a term of three years or more.

 

Cost of Borrowing

The costs charged to the borrower by the lender to obtain a loan, including not just interest but also certain other charges such as appraisal fees. When you obtain a mortgage, you will be informed of your cost of borrowing both as an amount and as an Annual Percentage Rate on the principal amount.

 

Deed

A legal document that confirms ownership of the property. In Quebec, a deed of hypothec sets out the terms of the mortgage.

 

Default

The failure to do something that you promised to do, such as make a payment as agreed in a mortgage.

 

Discharge

Should you sell your current home financed with a mortgage, break your current mortgage contract, make a prepayment equal to the remaining balance of your mortgage or pay off your mortgage in full through regular payments, you will be required to obtain a discharge of the mortgage registration from your mortgage provider. A discharge certifies that the mortgage on your home has been paid off in full, and that your home is free and clear of any obligations owing.

 

Down Payment

An amount of money you put towards the purchase of your home, which influences the mortgage amount you require. A down payment of 20% or more will determine whether your mortgage needs mortgage default insurance. If your down payment is less than 20% of your purchase price, your mortgage is high-ratio and needs mortgage default insurance. If your down payment is 20% or more of the purchase price, your mortgage is conventional and generally does not need mortgage default insurance. Other circumstances however may also require mortgage default insurance.

 

Early Renewal

You may find yourself wanting to renew your existing mortgage prior to the scheduled maturity date. Should this be the case, you do have options available that would enable you to take advantage of today's lower rates. With some lenders, if your mortgage maturity is within 120 days of its maturity date, you can renew your mortgage at today's rates, without penalty. If your mortgage maturity date is more than 120 days away, you can blend the interest rate of your current mortgage with the interest rate available today and lock in a new term. Or you can break your mortgage and get a new term at today's interest rate (interest penalties may apply). I can help you assess whether the interest savings outweighs the penalty amount.

  

Estimated Value

To estimate the value of your home, check your annual property tax assessment provided by your municipality. Please note that the Appraised Value of your property may be different from the value provided by your municipality.

 

Estoppel Certificate

A document that outlines the legal and financial state of a condominium corporation.

 

First Mortgage

The mortgage that is registered in first position at the land registry office. If there is more than one loan mortgage registered against your property, the mortgage that is registered first must be paid out first in the event of sale or default.

 

Guarantor

A person who will make repayments on a loan if the borrower fails to do so.

High Ratio Mortgage

A mortgage loan for an amount that is more than 80% of the value of the property.

 

Home Equity

The difference between the value of your home and the total amount of your outstanding mortgage. For the purpose of getting a mortgage, the value of your home is determined by a certified appraiser at the time of the application.

 

Prime Rate

An interest rate set by the bank or lender that fluctuates according to market conditions and the Bank of Canada's economic outlook.

 

Interest

The basic amount of money it costs to obtain a loan. Interest is included in your regular monthly mortgage payment. Interest is calculated on the day of each regular payment, based on the outstanding principal amount at that time, so the faster you reduce your principal, the less interest you pay.

 

Interest Rate

The percentage that will determine the amount of interest that you are required to pay.

 

Interest Adjustment Date

Mortgage payments are made in arrears. In other words, when each payment period is over, lenders look back and calculate their interest based on the money you owed during that period.

The interest adjustment date is the date from which your lender first starts calculating the normal ongoing interest that you’ll pay.

Interest adjustment dates tend to commonly fall on the 1^st day of the month after mortgage funds are advanced to the borrower.

For example, suppose you close your mortgage on April 25 and have signed up for monthly payments. Here is how the dates might stack up:
 

April 25: Mortgage starts (a.k.a. the closing date)

May 1: Interest adjustment date

June 1: First payment date

 

Leasehold Tenure

The right to use property for a set period of time. In other words, you do not own the property.

 

Liabilities

The amount that you owe to creditors. Examples include mortgages, credit card balances, line of credit balances, personal loans, car loans, etc.

 

Loan to Value (LTV) Ratio

The Loan to Value ratio describes the principal amount of a mortgage loan in relation to the value of the property.

For example, if your property is worth $100,000 and you made a down payment of $25,000, your required mortgage amount will be $75,000 and your LTV is 75%.

The LTV helps determine whether or not mortgage default insurance is required. LTV of 80% or less will be a conventional mortgage and will generally not need mortgage default insurance. LTV of more than 80% will be a high-ratio mortgage and will need mortgage default insurance. Other circumstances may also require mortgage default insurance.

 

Lump Sum Payment

You can benefit from the use of prepayment options that make it possible to pay off your mortgage faster.   Clients can make one time or on-going lump sum prepayments of their original mortgage balance, each mortgage year, without penalty.

 

Maturity Date

The maturity date is the last day of the term of your mortgage. Any outstanding balance is due on this date. However, if you have an outstanding balance you will usually have the opportunity to renew your mortgage into a new mortgage with a new principal amount, interest rate, term and amortization.

 

Mortgage

A mortgage is a loan that is secured by property. The word mortgage actually defines the rights over the property given by the borrower (property owner) in exchange for the loan.

   

Mortgage Life Insurance

Creditor insurance that pays off the remaining mortgage debt in the event of a borrower's death.

 

Mortgage Loan/DefaultInsurance

Mortgage Loan Insurance pays the lender in the event the mortgage borrower defaults on making payments. Such insurance is required by law for high ratio mortgages (those for an amount greater than 80% of the value of the property) and may be required under other circumstances. Should mortgage loan insurance be required, the lender will obtain Mortgage Loan Insurance on behalf of their  mortgage Client from either Canada Mortgage and Housing Corporation (CMHC), Genworth Financial Canada or Canada Guaranty.

Mortgage loan insurance premiums are determined by the insurer and are the responsibility of the mortgage client. They can be paid by making a one-time payment to the lender or by having the premium added to the total mortgage amount and thus become part of your regular mortgage payments.

For more information about Mortgage Loan Insurance or to calculate the premium, you can visit CMHC, Genworth or Canada Guaranty websites at: www.cmhc.ca or www.genworth.ca. Or www.canadaguarantee.ca

  

Mortgage Payment

The regular payment of principal and interest under a mortgage payment schedule. Most lenders offer weekly, bi-weekly, semi-monthly and monthly payment frequencies.

 

Mortgage Penalties

A mortgage is set for a pre-determined amount of time or term at funding or when renewed. Should the mortgage term be terminated prior to the maturity date either through sale of the home, early renewal or discharge, the mortgage client could be subject to penalties. The applicable penalties would be equal to the greater of the interest rate differential or 3 months interest plus any applicable fees related to the discharge request.

 

Mortgagee

The lender.

 

Mortgagor

The borrower.

 

MLS Listing

A report from Multiple Listing Service (MLS) describing the details of a property, including property taxes, measurements and features. It is provided by your real estate agent.

 

Number of Units

The number of self-contained living spaces within the property. For example, a self-contained living space would include a separate entrance, a kitchen, bathroom and living quarters that could be rented out.

 

Portable Mortgage

A mortgage you can take with you to your new home at your current rate, term and mortgage amount (or increase it with a blended rate). All our mortgages are portable.

 

Pre-Approved Mortgage

We can pre-approve a mortgage to a set maximum principal amount even before you find a house. This will guarantee your interest rate for 120 days on fixed term loans and can help you establish a price range in which to search for a home.

 

Prepayment Interest Rate Differential Amount

When the borrower pays off a loan before maturity at a time that interest rates are lower than the borrower's loan, the prepayment interest rate differential amount represents the difference between interest that the lender would have obtained from the borrower if the borrower kept with the loan, and interest that the lender can obtain under current interest rates.

For example, if the borrower pays out a loan with an interest rate of 7% and three years remaining at a time when the interest rate for a three year loan is 5%, the prepayment interest rate differential amount will represent 2% interest for three years on the outstanding balance at the time of payout.

 

Prepayment Options (Flexible Prepayment Options)

The prepayment options allow you to prepay some of the loan above and beyond your regular scheduled payments, at no charge – which could save you thousands over the life of your mortgage.  This will depend on the type of mortgage and lender privileges.  Example 20/25 prepayment privilege:

1. Make a principal payment of up to 20% of the initial amount, annually
2. Increase your regular mortgage payments by up to 25% of the initial payment amount, annually

 

Primary Borrower

The person whose name appears first on the Mortgage or Credit Account documents. There can only be one Primary Borrower.

 

Principal

The amount of money that you borrow.

 

Property Legal Description

The legal description of a property as described in the land registry office. Property legal descriptions look different based on the location of the property. The description can be typically found on a municipal property tax assessment.

 

Purchase Price

The actual amount paid to purchase the property. This does not include any fees associated with the purchase (such as land transfer tax, legal fees, insurance, etc.) or interest to be paid on the mortgage.

 

Rate Hold

If you are considering applying for a mortgage, but you're not ready to apply yet, the rate hold could be for you. A rate hold program essentially holds a fixed rate or the spread on a variable rate for up to 120 days from the date of request without having to apply. It can only apply to one interest rate, for one term at a time.  If you apply and fund a mortgage within the 120 days of the rate hold start date, you will receive the lowest rate during this period.

 

Security

A property or other asset offered as collateral for a loan. In the case of a mortgage, the property you are purchasing or refinancing forms the security for your loan.

 

Spread

For a Variable Rate Mortgage, it is the difference between Prime and the actual (posted) rate. So if  Prime is 4.00% and the posted rate is 5.00%, the spread is 1.00%.

 

Survey

A document providing details of the boundaries of your property, including measurements and structures.

 

Term

The length of the loan.  At the end of the term (on the maturity date), you must repay the outstanding principal amount, if any. Usually you have the option then to make the repayment or to renew the mortgage into a new loan with a new principal amount, interest rate, term and amortization.

 

Title

The right of ownership over the property.

 

Title Insurance

Insurance that protects your title to your property mainly through undiscovered title errors, survey problems, and even against fraud and forgery.

 

Title Search

A detailed examination of registered title documents to ensure that there are no rights over the property that may affect the owner's title.

 

Variable Rate Mortgage

A mortgage that has an interest rate that fluctuates over time.  Variable rate mortgages have an interest rate that may change to reflect changes in the prime rate.

 

Zoning

Geographic zones in a municipality designated for specific uses. For example, zoning by-laws will designate the types of buildings that can be built in certain places, such as residential, industrial, or commercial.