Mortgage Terminology: Breaking Down the Anatomy of the Mortgage Process

Mortgage Tips Trish Pigott 14 Oct

Buying a home is one of the most important financial decisions you will make. It’s common for a first-time homebuyer, or even someone who is experienced in the process, to feel overwhelmed when it comes to industry jargon.

To help you understand the process and have confidence in your choices, I have put together some of the more common mortgage terminologies you will encounter during the homebuying process! While I don’t expect you to read all of these now, I hope that this will be a helpful resource for you throughout your homeownership journey.

General Mortgage Terms

Amortization: The number of years that you take to fully pay off your mortgage (not the same as your mortgage term). Amortization periods are often 15, 20, or 25 years long.

Assuming a Mortgage: Taking over the obligations of the previous owner’s (or builder’s) mortgage when you buy a property.

Buy Down Rate: The portion of the interest rate on a buyer’s mortgage that you assume when they buy your home. If you’re selling your home and the prospective buyer doesn’t like the interest rate on their mortgage, you can offer to add a certain percentage of it onto your existing mortgage. You can add a maximum of 3%.

Closing Date: The date on which the sale of a property becomes final and the buyer takes possession of the property.

Down Payment: The money that you pay up front for a house. Typically range from 5%-20% of the total value of the home.

Home Insurance: Insurance to cover both your home and its contents (also referred to as property insurance). This is different from mortgage life insurance, which pays the outstanding balance of your mortgage in full if you die.

Inspection: The process of having a qualified home inspector identify potential repairs to the property you are interested in and their estimated cost.

Lump Sum Payment: An extra payment that you make to reduce the amount of your mortgage principal.

Mortgage: A loan that you take out in order to buy property. The collateral is the property itself.

Mortgage Life Insurance: This form of insurance pays the outstanding balance of your mortgage in full if you die. This is different from home or property insurance, which insures your home and its contents.

Pre-Approved Mortgage Certificate: A written agreement that you will get a mortgage for a set amount of money at a set interest rate. Getting a pre-approved mortgage allows you to shop for a home without worrying about how you’ll pay for it.

Offer to Purchase: A legally binding agreement between you and the person who owns the house you want to buy. It includes the price you are offering, what you expect to be included with the house, and the financial conditions of sale (your financing arrangements, the closing date, etc.).

Porting: Transferring an existing mortgage from one home to a new home when you move. This is known as a “portable” mortgage.

Pre-Payment: Repaying part of your mortgage ahead of schedule. Depending on your mortgage agreement, there may be a prepayment cost for pre-paying.

Refinancing: The process of paying out the existing mortgage for purposes of establishing a new mortgage on the same property under new terms and conditions. This is usually done when a client requires additional funds. The client may be subject to a pre-payment cost.

Renewal: Once the original term of your mortgage expires, you have the option of renewing it with the original lender or paying off all of the balance outstanding.

Term: The length of time during which you pay a specific rate on the mortgage loan (i.e., the number of years in your mortgage contract). This is different than amortization; mortgages are amortized over 20-25 years, with a shorter term (typically 6 months to 5 years). After the term expires, the interest rate is usually renegotiated with the lender.

Mortgage Types

Closed Mortgage: This type of mortgage must usually remain unchanged for whatever term you agree to. Prepayment costs will apply if you payout, renegotiate, or refinance before the end of the term.

Convertible Mortgage: These offer the same security as a closed mortgage, but allows you to convert that to a longer, closed mortgage at any time – without prepayment costs. Typically associated with fixed rate mortgages.

High-Ratio Mortgage: This is the mortgage obtained when you have less than 20% of the total purchase price to put down as your downpayment. These mortgages must be insured, typically through CMHC, Genworth Financial or Canada Guaranty.

Open Mortgage: This type of mortgage may be repaid, in part or in full, at any time during the term without any prepayment costs.

Rate Types

Fixed Rate Mortgage: An interest rate that does not change during the entire mortgage term.

Variable Rate Mortgage: An interest rate that will fluctuate in accordance with the prevailing market prime rate during the mortgage term.

Mortgage Rate: The percentage interest that you pay on top of the loan principal. For example, you may take out a mortgage of $100,000 at a rate of 12%. Your monthly payments will consist of a portion of the original $100,000, plus 12% interest.

Closing Costs

These are costs that are in addition to the purchase price of a property and which are payable on the closing date, such as the following:

Appraisal: The process of determining the lending value of a property. There is usually a fee to have an appraisal done.

Interest Adjustment: The amount of interest due between the date your mortgage starts and the date the first mortgage payment is calculated from. Sometimes there is a gap between the closing date of your home purchase and the first payment date of your mortgage, so an extra payment may be required to cover this. The payment is generally due on your closing date. You can avoid all this by arranging to make your first mortgage payment in exactly one payment period (e.g., one month) after your closing date.

Land Transfer Tax: Tax that is levied (in some provinces) on any property that changes hands.

Legal Fees and Disbursements: Some of the legal costs associated with the sale or purchase of a property. It’s in your best interest to engage the services of a real estate lawyer (or a notary in Quebec).

Prepaid Property Tax and Utility Adjustments: The amount you will owe if the person selling you the home has prepaid any property taxes or utility bills. The amount to reimburse them will be calculated based on the closing date.

Property Survey: A legal description of your property and its location and dimensions. An up-to-date survey is usually required by your mortgage lender. If not available from the vendor, your lawyer can obtain the property survey for a fee.

Sales Taxes: Taxes applied to the purchase cost of a property. Some properties are sales tax exempt (GST and/or PST), and some are not. For instance, residential resale properties are usually GST exempt, while new properties require GST. Always ask before signing an offer.

If you are looking to purchase a new home (or your first one!), please don’t hesitate to reach out to me directly to set up a phone call to discuss your needs. I would be happy to help you find the best mortgage to suit your needs!

 

Refinancing – Process, Consideration, and Benefits

Mortgage Tips Trish Pigott 13 Oct

Refinancing your mortgage refers to the process of renegotiating your current mortgage agreement for a variety of reasons. Essentially, refinancing allows you to pay off your existing mortgage and replace it with a new one.

There are a variety of reasons to consider mortgage refinancing, such as wanting to leverage large increases in property value, taking out equity for upgrades or renovations, expanding your investment portfolio, consolidating debt, getting a better rate, paying for post-secondary education, managing a divorce or changing your mortgage from fixed to a variable (or vice-versa).

Refinancing allows you to access up to 80% of your home’s equity. This can help with reducing financial stress and getting you back on track for your financial future, while still allowing you to manage your current needs. Beyond helping you get a better financial footing, refinancing has additional benefits including:

  1. Access a Better Rate: One reason to refinance your mortgage is to get a better rate – this is especially true when done through a mortgage professional such as myself. On average, I have access to over 90 lenders! This allows me to find the best mortgage product for your unique needs.
  2. Consolidate Debt: There are many different types of debt from credit cards and lines of credit to school loans and mortgages. But, did you know that these types of debt have much higher interest rates than those you would pay on a mortgage? Refinancing can free up cash to help you pay out these debts! While it may increase your mortgage, your overall payments could be far lower and would be a single payment versus multiple sources. Keep in mind, you need at least 20 percent equity in your home to qualify.
  3. Modify Your Mortgage: Life is that it is ever-changing and sometimes you need to pay off your mortgage faster or change your mortgage type. Refinancing can help with this too!
  4. Utilize Your Home Equity: If you need funds, you can refinance your mortgage to access up to 80% of your home’s appraised value!

As with everything, refinancing comes at a price! If you think that refinancing your mortgage could be the right solution, it is important to talk to us before making any changes to ensure you are not hit with surprise penalties. Talking to a mortgage broker about refinancing also ensures expert advice, plus access to even greater rates and mortgage plans to best suit your refinancing goals.

Is Your Mortgage Portable?

Mortgage Tips Trish Pigott 6 Oct

Selling your current home and moving into a new one can be stressful enough, let alone worrying about your current mortgage and whether you’re able to carry it over to your new home.

Porting enables you to move to another property without having to lose your existing interest rate, mortgage balance and term. And, better yet, the ability to port also saves you money by avoiding early discharge penalties.

It’s important to note, however, that not all mortgages are portable. When it comes to fixed-rate mortgage products, you usually have a portability option. Lenders often use a “blended” system where your current mortgage rate stays the same on the mortgage amount ported over to the new property and the new balance is calculated using the current interest rate.

With variable-rate mortgages, on the other hand, porting is usually not available. As such, upon breaking your existing mortgage, a three-month interest penalty will be charged. This charge – which can be a surprising $1,500-$4,000 penalty at closing – may or may not be reimbursed with your new mortgage.

 

Porting Conditions

 

While porting typically ensures no penalty will be charged when you sell your existing property and buy a new one, some conditions that may apply include:

  • Some lenders allow you to port your mortgage, but your sale and purchase have to happen on the same day. Other lenders offer a week to do this, some a month, and others up to three months.
  • Some lenders don’t allow a changed term or force you into a longer term as part of agreeing to port you mortgage.
  • Some lenders will, in fact, reimburse your entire penalty whether you are a fixed or variable borrower if you simply get a new mortgage with the same lender – replacing the one being discharged. Additionally, some lenders will even allow you to move into a brand new term of your choice and start fresh.
  • There are instances where it’s better to pay a penalty at the time of selling and get into a new term at a brand new rate that could save back your penalty over the course of the new term.

While this may sound like a complicated subject, your mortgage professional will be able to explain all of your options and help you select the right mortgage based on your own specific needs.

 

Deposit Loans and Down Payments

Mortgage Tips Trish Pigott 17 Sep

Coming up with a down payment to buy a home purchase can be difficult. But a down payment is an integral part of securing a mortgage. Today Canadians have to come up with at least 5% down when applying for a mortgage. If saving up for this kind of money proves to be a challenge for some homebuyers, in some cases borrowing the finances could be an option. Borrowing a down payment for a mortgage in Canada appears to be a growing trend in the country. What type of options exist for those who are unable to save up enough for a down payment in order to secure a home loan? Here are a few down payment borrowing sources for Canadians to consider looking into.

Line of Credit

A line of credit is a loan product that doesn’t work like a typical loan. Instead, it works somewhat like a credit card in which you withdraw funds on credit – up to your assigned limit – and pay interest only on the portion used. Once that money is paid back, you can borrow that money, again and again, paying only interest on the amount withdrawn. Can you use a line of credit for a down payment? Yes, but it cannot be from the same financial institution that the mortgage is being obtained from. Homebuyers may borrow against their line of credit in order to get the money needed to come up with a decent-sized down payment for their mortgage. However, this option should be used with caution in order to reduce any risk associated with overleveraging.

Personal Loan

A personal loan may be an option as a source of down payment funds, but usually only if your credit score and financial history are healthy. That’s because a lender will want to ensure that you are financially capable of handling additional debt, especially if you’re planning to take out a mortgage for a home purchase. Unsecured debt – which is what a personal loan is – can be risky for lenders when loaning out money to consumers who are not in good financial standing. If there is no collateral for the lender to collect if you ever default on your loan, they could be left with a bad deal. That’s why lenders will insist on borrowers having stellar credit, a high income, and a reasonable debt load before they approve a personal loan on top of a mortgage.   If you are considering taking out a personal loan to borrow for a down payment, something to keep in mind is that this will add to your debt and affect your debt-to-income ratio.

RRSP’s

The federal government offers down payment assistance in the form of the Home Buyers’ Plan. This program allows Canadians to borrow as much as $25,000 from their RRSPs ($50,000 for a couple) to be put towards a down payment on the purchase of a home. The great thing about this plan is that you have 15 years to repay your RRSP funds before being taxed on it. If you pay back all the money borrowed before this 15-year period is up, the funds are non-taxable.

There are eligibility requirements for the Home Buyers’ Plan. You must:

  • Be a first-time homebuyer
  • Sign a purchase agreement on a qualifying home
  • Be a Canadian resident
  • Designate the property as your principal home no longer than one year after buying it

In addition, the RRSP funds being used must be on deposit for a minimum of 90 days before borrowing.

Ideally, you should take the time to save up for a down payment on a home without having to borrow funds. That said, it can be a real struggle to come up with the amount of money needed for a decent down payment amount. When all else fails, there are ways to borrow the funds needed to come up with a down payment for a home purchase. Just be sure to speak with a financial advisor or mortgage specialist before choosing which route to take to make your dreams of buying a home a reality.

Alternative Financing for Funding Your Mortgage

Mortgage Tips Trish Pigott 26 Aug

If you do not qualify for traditional financing all is not lost, since you may be eligible for an alternative – or private – funding.

Mortgage professionals often have access to private investors who are willing to lend money to BFS individuals looking to obtain mortgages. Although you will pay a higher interest rate – on average about 12% – this route may enable you to acquire funds to purchase a home.

It’s also important to note that there are added fees involved with private funding because the deals involve a higher degree of risk. The combined lender/brokerage fee will depend on the specific deal and the risk it poses, but the figure will be disclosed upfront so you know exactly what you’ll be expected to pay for these services.

Another key point to consider is that private financing is equity-based, meaning that the lender’s decision will be based on a specific piece of real estate. Private lenders want to know that the property is marketable and that they will be able to easily sell it should the mortgage go into foreclosure.

What exactly is alternative financing? Alternative finance refers to forms of finance that are outside the institutional finance system of banks and capital markets. ‘Fintech’ is the ecosystem within alternative finance made up of companies, technology, and processes that aim to improve traditional methods of finance in categories such as:

  • Payments and invoicing
  • Consumer lending and credit
  • Small business lending and credit
  • International money transfers
  • Equity financing and crowdfunding
  • Insurance
  • Consumer banking
  • Wealth management
  • Savings and investments
  • Capital markets
  • Risk management
  • Regulation management
  • Cryptocurrency and blockchain

Fixed Rate or Variable Rate

Mortgage Tips Trish Pigott 20 Aug

The decision to choose a fixed or variable rate is not always an easy one. It should depend on your tolerance for risk as well as your ability to withstand increases in mortgage payments. You can sometimes expect a financial reward for going with the variable rate, although the precise magnitude will ebb and flow depending on the economic environment.

Fixed-rate mortgages often appeal to clients who want stability in their payments, manage a tight monthly budget, or are generally more conservative. For example, young couples with large mortgages relative to their income might be better off opting for the peace of mind that a fixed-rate brings.

A variable rate mortgage often allows the borrower to take advantage of lower rates — the interest rate is calculated on an ongoing basis at a lenders’ prime rate minus a set percentage. For example, if the prime mortgage rate is 5.5 percent, the holder of a prime minus 0.5 percent mortgage would pay a 5.00 percent variable interest rate.

As a consumer, the best option is to have a candid discussion with your mortgage professional to ensure you have a full understanding of the risks and rewards of each type of mortgage.

 

First-Time Home Buying Tips

Mortgage Tips Trish Pigott 19 Aug

A successful home buying experience is all about getting the details right from start to finish. These tips for first-time homebuyers will help you navigate the process, save money and close the deal. We organized them into four categories:

  • Preparing to buy tips.

  • Mortgage selection tips.

  • Home shopping tips.

  • Home purchasing tips.

     

Preparing to buy tips

The main costs to consider when saving for a home are your down payment, closing costs, and your moving expenses. You will want to sit down and look at how much you can spend on a house before starting to shop. Our My Mortgage Toolbox is a great app to use to calculate your home affordability. The app can help with setting a price range based on your income, debt, down payment, and credit score. Lastly, check your credit score! Your credit score will determine whether you qualify for a mortgage and affect the interest rate that the lenders will offer. Start by getting a copy of your credit report. Be sure you are paying your bills on time, and keep your credit card balances low.

Mortgage selection tips

Your mortgage broker will be able to go over the mortgage program options that will work best for you. You will discuss the mortgage rates and fees comparisons from the different lenders. Your mortgage broker will talk with you about getting pre-approved and the advantages that can bring when it comes time to place an offer on a home.

Home shopping tips

When you start to shop for your home, choose a real estate agent carefully. A good agent will look in the market for homes that meet your needs and guide you through the negotiation and closing process. Pick the right type of house and neighborhood to fit your lifestyle and budget. Would you like a fixer-upper home or a home that is more renovated and ready to move in. Think about your long-term needs and whether a starter home or forever home will meet them best. If you plan to start or expand your family, it may make sense to buy a home with extra room to grow.

Home purchasing tips

When you find a home you would like to purchase, paying for a home inspection will add to making an informed decision about buying the property. The home inspector will do a thorough assessment of the structure and mechanical systems. Negotiate with the seller; you may be able to save money by asking the seller to pay for repairs in advance or lower the price to cover the cost of repairs that will need to be made. The final tip is to purchase homeowners insurance before closing the deal. Home insurance covers the cost to repair or replace your home and belongings if they’re damaged by an incident covered in the policy. It also provides liability insurance if you’re held responsible for an injury or accident.

Borrowing Against Home Equity

Mortgage Tips Trish Pigott 18 Aug

What is equity and how does it work? Home equity is the difference between the value of your home and how much you owe on your mortgage. Home equity is the difference between the value of your home and how much you owe on your mortgage. For example, if your home is worth $250,000 and you owe $150,000 on your mortgage, you have $100,000 in home equity.

Your home equity goes up in two ways:

  • As you pay down your mortgage
  • If the value of your home increases

You may be able to borrow money secured against your home equity. Interest rates on loans secured against home equity can be much lower than other types of loans. Financing for equity will look different from a mortgage loan. Your mortgage broker will be able to go over with you which financing options are available for home equity loans. You must go through an approval process before you can borrow against your home equity. If you’re approved, your lender may deposit the full amount you borrow in your bank account at once.

Other financing options to look at in refinancing your home would be a refinancing loan, a second mortgage, a HELOC, or a loan or line of secured credit within your home. Something to keep in mind with refinancing, you may find that the interest may be different than the part that is on your original mortgage. You may also find that you have to pay a new mortgage loan insurance premium.

When you and your mortgage broker go over the option of a second mortgage, some points that you will find about this option are that you are able to borrow up to 80% of the appraised value of your home, minus the balance on your mortgage. The loan is secured against your home equity. While you pay off your second mortgage, you also need to continue to pay off your first mortgage.

A HELOC is very similar to a regular line of credit. You have the ability to borrow money when needed, up to the credit limit amount. You are able to take the money out of the HELOC, when you pay it back you are able to borrow again. This is a secured line of credit against your home. The interest rates are variable, they will change as the market interest rates go up or down.

One last option to look at when borrowing against your home is to borrow on amounts that you prepaid. If you have previously made lump sums on your mortgage, your lender may allow you to re-borrow that money. You can borrow the total amount of all the prepayments you have made. Any money you re-borrow will be added to the total of your mortgage. With this option, you will pay either a blended interest rate or the same interest rate as your mortgage on the amount you borrow. A blended interest rate combines your current interest and the rate currently available for a new term.

We have more information in our Mortgages drop down menu

Making Your Finances a Regular Priority

Mortgage Tips Trish Pigott 16 Aug

Just like regular housekeeping, looking at your finances is something that needs to be regularly done if you want your finances to be in order and shining. Schedule some time once a week to look over budgets and review your goals to see where you are with what you have in the bank – and what you’re trying to achieve.

Overspending can be prevented with a regular review and clear out of your finances. Can you reduce paying for apps or streaming services that you just don’t use anymore? Do you know how much you spend each week eating out or over buying groceries for your home that end up in the waste? Go through all aspects of your financial life and assess whether it’s working and if improvements could be made.

Budgeting gives you control when it comes to finances and is an essential part of financial housekeeping. Make sure you know what’s coming in every month – and that you’ve estimated your outgoings so that there are no surprises.

Regularly looking at your budget will keep you on track for your financial goals and have you feeling more secure in your day to day purchases. When you have an idea in mind of your goals, talking with a Mortgage Broker will help you to bring you close to knowing what small details you need to look at IE looking at what is going on with your credit, and other steps needed to achieve the end financial goal.

 

 

Mortgage Insurance Protection

Mortgage Tips Trish Pigott 11 Aug

When purchasing your home, it will be a time filled with excitement. A product to talk about with your Mortgage Broker is mortgage protection insurance. Mortgage protection insurance can pay some or all of your outstanding mortgage balance if you lose your job, become disabled, or pass away, so you don’t leave a large debt for your family. Below are some examples of benefits from the Manulife One Protection Place.

Benefits

  • Long-term protection
  • Reduce your mortgage debt
  • High Maximum coverage

The maximum insurance amount of $500,000 will cover:

  • The average month-end balance of your Manulife One account over the last 12 months or the outstanding balance on the day you pass away – whichever is less.
  • Interest accumulated on the debt balance between the date of death and the date the insurance payment is made.
  • Fees and expenses to discharge your mortgage up to 5% of the total insurance payout.

Premiums

The smaller your outstanding balance, the lower your monthly premium. Premiums will vary. They’re calculated every month based on the outstanding month-end balance of your Manulife One account and the age when you were approved for the coverage.

If you would like to know more details about Mortgage Protection Insurance we are always available to answer any questions.

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