You could gain an investment!
Very few people have the full amount to pay for a property when they buy it, especially in these times of escalating house prices. Most people barely raise the necessary downpayment and must finance the rest by taking advantage of mortgage loans. Arranging financing can be a block to a successful conclusion of a sale and you can help by setting the wheels in motion or by becoming directly involved as a mortgagee.
UNDERSTANDING YOUR MORTGAGE — it's easy when you know how!
Let us explain to you exactly what a mortgage is: • A mortgage is a loan by a lender (mortgagee) to a property owner (mortgagor). The property itself is provided as security (collateral). The money involved in the loan is known as "the principal". Arrangements are made to pay off the principal plus the interest at prearranged intervals.
• The term of a mortgage is the length of time that a mortgagee agrees to lend money to the mortgagor at a prescribed interest rate. A term is usually anywhere from six months to seven years. This does not mean that you have to pay back the whole principal amount plus interest by the end of the term — most mortgages are usually divided up over a much longer span of time (amortization period). The term of the mortgage may expire without the actual mortgage ending, but a new term can be negotiated at the current rates of interest.
• The amortization period is the length of time over which a mortgage is paid in full. This can be ten, fifteen, twenty or most commonly twenty-five years.
• Interest rates are the current carrying costs charged by financial institutions and other mortgagees. These, of course, can affect the housing market. When rates are high, people are wary of remortgaging, or indeed of investing in any long-term financial commitment that may leave them short of cash and their investments in jeopardy. When interest rates are low and loans are easy to carry, the housing market is buoyant and people buy and sell more readily. In fact they can increase their equity in their home by paying down their mortgage with more ease.
• Open mortgages are given for a short term, typically six months to one year. When interest rates are unstable or expected to decline, this is the preferred mortgage because the mortgagor can discharge an open mortgage in favour of a closed mortgage, thereby taking advantage of lower rates, without incurring penalty charges.
• Closed mortgages are usually for longer terms, typically anywhere from one to seven years. When interest rates are stable, or are expected to increase in the long term, this is the preferred type of mortgage. However, penalty charges are usually incurred if this type of mortgage is discharged before the end of its term.
• Second and third mortgages, also known as equity loans, are often required when the purchaser does not have enough cash to pay the difference between the first mortgage and the purchase price.
• Under Canada's Bank Act, financial lending institutions cannot lend more than 75 percent of the appraised value or purchase price of a property. If the purchaser has less than the remaining 25 percent, another mortgage can be obtained for up to 10 percent of the property value from a finance company. In special cases, the purchaser may even obtain additional mortgages.
• One lender cannot usually act as both first and second mortgagee.
• An alternative to obtaining additional mortgages to complement the conventional first mortgage is the Canada Mortgage and Housing Corporation (CMHC) insured mortgage. A CMHC insured mortgage can be obtained for up to 90 percent of the property value under $120, 000 and up to 80 percent of the property value over $120, 000. The financial institution giving a CMHC insured mortgage acts as sole mortgagee in this case. The purchaser must pay CMHC a penalty of 2. 5 percent of the total mortgage loan for the privilege of getting this larger first mortgage. On a principal residence the penalty is added on to the mortgage and can be amortized over the life of the mortgage. If the property is being purchased only as an investment, and not as a principal residence, this penalty must be paid upon purchase.