Let's go over the variety of different mortgage terms available and what they mean
Other Mortgage Terms
Rates are just one aspect of the mortgage, but there are several other terms you should be aware of when deciding which lender or product to choose such as:
Mortgage term length refers to the period of time during which a mortgage loan is in effect and the borrower is obligated to make payments to the lender at a specified interest rate.
In general, mortgage term lengths can range from as short as 6 months to as long as 10 years, but the most common terms in Canada are 1, 2, 3, 4, 5, 7 and 10 years. At the end of each term, borrowers have the option to renew the mortgage at the current interest rate or negotiate a new rate and term with the lender without having to pay a pre-payment or early payout penalty.
In Canada, mortgage amortization refers to the process of gradually paying off a mortgage loan through a series of regular payments, where each payment includes both principal and interest. The mortgage amortization period is the length of time it takes to fully pay off the mortgage loan, typically in increments of 5 years, up to a maximum of 30 years.
Mortgage amortization in Canada is regulated by the Canadian government, which sets maximum amortization periods for certain types of mortgages. For example, the maximum amortization period for an insured mortgage in Canada is typically 25 years, although it can be longer for uninsured mortgages. The length of the mortgage amortization period affects the size of the monthly mortgage payments, with longer amortization periods resulting in lower monthly payments but higher total interest costs over the life of the mortgage.
In Canada, mortgage lenders are required to provide borrowers with an amortization schedule that outlines the amount of each mortgage payment, the portion of each payment that goes towards interest and principal, and the remaining mortgage balance at the end of each payment period. This schedule can help borrowers understand how their mortgage payments are applied and how much of the mortgage loan they still owe over time.
Mortgage default insurance, also known as CMHC insurance by many, is a type of insurance that protects lenders in the event of a borrower defaulting on their mortgage. There are two other companies who also offer mortgage default insurance: Sagen and Canada Guaranty. It is required for anyone who makes a down payment of less than 20% of the purchase price. For a purchase with a 5% down payment, the default insurance premium is 4%, and between 5-20% the premium is on a sliding scale. The premium is usually added to the mortgage balance.
Click HERE to see CMHCs chart that shows the default insurance premiums for different loan-to-value ratios.
There are a variety of payment frequency options to choose from such as: weekly, accelerated weekly, bi-weekly, accelerated bi-weekly, semi monthly & monthly.
Weekly accelerated means that the monthly payment amount is divided by four and that payment amount is withdrawn once a week on a specific day. There are still 52 payments being made throughout the year, but the amounts are slightly higher, which shortens your amortization over time.
Bi-weekly accelerated means that the monthly payment amount is divided by two, so you are making 26 payments throughout the year, rather than 24 with regular bi-weekly. The amortization is shortened over time with this option as well.
Not all lenders allow all of these payment frequency options, so be sure to ask prior to choosing a lender if the frequency is important to you!
Standard vs Collateral Charge
There are two different types of mortgage charges: standard and collateral. They are two types of mortgage loans that differ in how they are secured by the property.
A standard charge mortgage is a traditional mortgage that is registered with the land titles office for the exact amount of the mortgage. The lender holds a "standard charge" against the property for the amount of the mortgage loan. This means that the mortgage cannot be increased without the borrower's consent and if the borrower wants to switch lenders, they can do so without having to pay any fees related to the registration of the mortgage.
On the other hand, a collateral charge mortgage is a type of mortgage that is secured by the full value of the property, up to a maximum amount that is set by the lender. With a collateral charge mortgage, the lender registers a "collateral charge" on the property for the maximum amount of the mortgage, regardless of the actual amount of the loan. This means that the lender has more flexibility to increase the amount of the mortgage in the future without requiring the borrower's consent, up to the maximum amount of the collateral charge. However, if the borrower wants to switch lenders, they may have to pay additional fees related to the discharge and re-registration of the mortgage.
Another difference between the two types of mortgages is that with a standard charge mortgage, the borrower may be able to use the equity in the property as security for other loans or lines of credit. With a collateral charge mortgage, the lender holds the full value of the property as collateral, which may limit the borrower's ability to use the property as security for other loans.
It's important for borrowers to understand the differences between these two types of mortgages and to choose the one that best suits their needs and financial goals.
A mortgage is a type of loan used to finance the purchase of a property, and it is secured by the property itself.
A first mortgage is a loan that is taken out to purchase a property and is registered with the government as the primary lien on the property. This means that if the borrower defaults on the loan, the lender has the right to foreclose on the property and sell it to recoup their losses.
A second mortgage, on the other hand, is a loan that is taken out on a property that already has a first mortgage in place. Second mortgages are also secured by the property, but they are registered with the government as a secondary lien. In the event of default, the first mortgage lender has priority in the distribution of funds from the sale of the property, and the second mortgage lender is paid only after the first mortgage lender has been satisfied.
Because second mortgages carry more risk for the lender, they often come with higher interest rates than first mortgages. They are also usually smaller in size than first mortgages and may have different repayment terms. Second mortgages are often used to access the equity in a property to finance renovations, pay off high-interest debt, or make other large purchases.
Some lenders offer the choice of having the lender pay on your behalf or paying your property tax directly
If the lender pays on your behalf, a portion of your monthly mortgage payment is set aside to pay your property taxes. Your mortgage lender will then pay the property taxes on your behalf when they are due. This can help you to budget for your property taxes and ensure that they are paid on time.
If you pay your property taxes directly to the municipality, you will need to make sure that you have enough funds available to pay your property taxes when they are due, as failure to pay on time can result in penalties and interest charges.
Pre-payment provisions are terms and conditions in a mortgage contract that outline the borrower's ability to make extra payments or pay off the mortgage loan in full before the end of the term without incurring a penalty. These provisions are important for borrowers who want the flexibility to pay off their mortgage early, either by making additional payments or by refinancing the loan with a lower interest rate.
In Canada, most mortgage agreements include pre-payment provisions, which can vary depending on the lender and the type of mortgage.
This provision allows the borrower to make extra payments on the mortgage loan without penalty, up to a certain percentage of the original mortgage amount or a set dollar amount each year. This can help borrowers pay off their mortgage faster and save money on interest costs over time.
It is important for borrowers to carefully review the pre-payment provisions in their mortgage agreement and understand how they can affect their ability to pay off the mortgage early. Some lenders may offer more flexible pre-payment provisions than others, so it is important to compare different mortgage options and choose the one that best meets the borrower's needs and goals.
Early Payout Penalties
Also called pre-payment penalties, it refers to a fee that a borrower may be charged for paying off a loan or mortgage before the end of the agreed-upon term. Early payout penalties are designed to compensate lenders for the interest income they would have earned if the borrower had continued to make payments according to the original schedule.
The most common method used by lenders is to charge a percentage of the outstanding balance, such as three months' interest, or the interest differential, which is the difference between the interest rate on the mortgage and the current interest rate at the time of the payout.
It's important for borrowers to carefully review their loan or mortgage agreement before signing to understand the terms and conditions related to early payout penalties. Some lenders may offer more flexible terms that allow for early repayments without penalty, while others may charge substantial fees that could make early repayment financially unfeasible.
Mortgage convertibility refers to the ability of a borrower to convert their existing mortgage from one type to another, without having to pay additional fees or penalties. This typically involves converting a variable rate mortgage into a fixed rate mortgage.
Most mortgage lenders offer mortgage convertibility as an option, which can provide borrowers with greater flexibility and peace of mind. This means that borrowers can take advantage of changes in the interest rate environment or their personal financial situation, and adjust their mortgage accordingly, without incurring significant costs.
It's important to note that there may be certain restrictions or limitations associated with mortgage convertibility, and it's important for borrowers to carefully review the terms and conditions of their mortgage agreement before considering this option.
Mortgage assumability refers to the ability of a homebuyer to take over an existing mortgage from the seller of a property. In other words, the buyer assumes the existing mortgage, which means they take over the remaining balance and continue making payments on the loan.
Some mortgages are assumable, which means that a buyer can take over the seller's mortgage at the same interest rate and under the same terms and conditions. This can be an attractive option for homebuyers who want to take advantage of a lower interest rate that the seller may have obtained.
It's important to note that not all mortgages are assumable, and even if a mortgage is assumable, the lender may require the buyer to meet certain eligibility criteria and go through a qualification process. Additionally, the seller may still be liable for the mortgage if the buyer defaults on payments. As such, it's important for buyers and sellers to carefully review the terms and conditions of an assumable mortgage before entering into an agreement.
Mortgage portability is a feature that allows a borrower to transfer their existing mortgage from one property to another, without having to pay penalties or fees associated with breaking the mortgage early. This means that a borrower can sell their current home and purchase a new one, while keeping the same mortgage and interest rate, as long as the new property meets certain criteria and the lender approves the transfer.
Most mortgage lenders offer mortgage portability as an option, which can be a valuable feature for homeowners who may need to move or upgrade their home before the end of their mortgage term. This can help borrowers save money by avoiding penalties for breaking their mortgage early, and also allows them to keep their current interest rate, which may be lower than current market rates.
It's important to note that there may be certain restrictions or limitations associated with mortgage portability, and it's important for borrowers to carefully review the terms and conditions of their mortgage agreement before considering this option. Additionally, the new property must meet the lender's criteria for approval, which may include factors such as the purchase price, location, and condition of the property.
Skip a Payment
Skip a payment is a feature offered by some lenders that allows borrowers to defer their scheduled loan payment for a specified period of time, usually one month. This means that the borrower can choose to skip a payment without incurring any penalties or negative impacts to their credit score.
This feature is often offered as a way to help borrowers who may be experiencing temporary financial difficulties, such as a job loss or unexpected expenses.
It's important to note that while skipping a payment can provide temporary relief for borrowers, it may also result in additional interest charges and extend the term of the loan. As such, borrowers should carefully consider the potential long-term impacts of skipping a payment and should only use this feature as a last resort when other options are not available.
It's also important to note that not all lenders offer the skip a payment feature, and some may charge a fee or impose certain restrictions on when and how often a borrower can skip a payment. As such, borrowers should review the terms and conditions of their loan agreement to understand their options and any associated costs or limitations.
Bone Fide Sales Clause
A bona fide sales clause is a provision in a loan agreement that prevents the borrower from paying out the loan or switching to another lender until the end of the term unless the property is sold.