Frequently Asked Questions
High ratio mortgage.
What is a high ratio mortgage?
A mortgage for more than 75% of the property value. Whenever you need a mortgage loan that is greater than 76% to 90% of the current market appraised value of your home it is considered a high ratio or insured mortgage. If you are a first time home buyer then you can borrow up to 95% value and only need to come up with a 5 percent minimum down payment. The Canada Mortgage and Housing Corporation (CMHC) insures the lender in case you default on your loan. You must pay for this insurance premium which is usually tacked on top of your loan. If the mortgage lender feels that you are still a risk for default even though you have paid more than 25% down the lender can insist that you insure the mortgage anyway. However, in this situation a mortgage consultant would probably shop this mortgage to a lender that didn’t insist on insuring. The fees for CMHC can be as high as 2.5% of the mortgage principal but is often not noticed by a borrower because of being added to your mortgage principal. Rates for a high ratio loan vary widely between lenders so it is best to use a mortgage consultant to explore the best options for you.
Weekly vs monthly payments.
How much better off am I with weekly vs. monthly payments?
Despite popular belief, and a lot of vendor marketing, the advantages in weekly vs. monthly payment frequency is slight. It is not really the frequency that makes a big difference but how much you pay. Any extra payment towards your principal dramatically improves your amortization period. Think payment amount not frequency of payment.
What is the advantage of a pre-approved mortgage?
The purpose of a pre-approval is to confirm in writing the maximum amount of money that you can rely on for mortgage purposes. When interest rates are fluctuating, it’s an advantage to know what your borrowing limit is before you start house hunting. With a pre-approval, a lender will guarantee you for a specific mortgage amount for a period of time. If the mortgage interest rate drops before the lender advances the funds for a mortgage, you are given the lower mortgage rate. If the rates rise, you are given the rate at the time you had the mortgage pre-approved.
What is a second mortgage?
A second mortgage is simply an additional mortgage resgistered against the title of you home. Some lenders call it a "Home Equity Loan" or "Home Equity Line of Credit" and since these types of loans are registered against the title of your home as a second charge - they are all second mortgages.
Co-signer vs Guarantor.
What is the difference between Co-signer and a Guarantor?
A Co-signer is placed on the mortgage and is registered on the title. A Guarantor signs a document that personally guarantees the mortgage. Most banks will do both. Some banks prefer that co-signer live on the property.
Is the lender obligated to renew my mortage?
At the end of the term of my mortgage is the lender obligated to renew my mortgage?
No. The lender is not under any obligation to mortgage renewal. It does not 'automatically' renew. In fact if you have 'missed' or been late with any payments the lender could use this as an excuse not to renew with you. A loss of a job or a divorce may be another reason. But, in truth, no excuse is necessary for the lender to call your loan. This can not be understated. For example, it is common for businesses to find their commercial mortgages NOT renewed for any reasonable reason at the end of term. And this may be no fault of the business that paid their mortgage payments on time. A bank could refuse to renew because they don't like the economic climate of a particular geographic area or even a type of industry a business operates in. Think about the hardships suffered. For this reason alone it is critical for businesses and homeowners to obtain a quote from a mortgage consultant 60 to 90 days before their current mortgage matures. This way if your current lender does not offer you a renewal you have a backup lender in the wings. If you use a mortgage consultant you will often benefit with a lower rate anyway.
Does a lender charge a renewal fee?
Often a lender will attempt to charge a renewal fee or tempt you to renew without a fee if you sign within a certain 'time offer' at their posted rates. Please keep it mind that if you use a mortgage consultant it is very, very rare for you to ever pay a renewal fee. For all conventional residential mortgages there will not be a fee because the mortgage consultant will shop the market for you and find a lender that doesn't charge a fee AND will beat your current lender's mortgage renewal rate!
What is an open mortgage?
An open mortgage gives you the most flexibility in making extra payments towards your mortgage principal and even lets you pay off your mortgage entirely whenever you wish to. If you have uncertainty in your life such as a serious illness, a looming separation or a possible job transfer to another city it is better to have an open mortgage. This way if you 'have to move' you can pay off your mortgage without any penalty. This could save you thousands in prepayment penalties. Warning! Not all-open mortgages are created equal. Check with a mortgage consultant to see just how 'open' your mortgage is!
What is a closed mortgage?
Compared to open a closed mortgage offers little to no privileges in paying off your mortgage early. You can not pay off your mortgage without attracting penalties, called prepayment penalties, from the lender. Warning! Not all closed mortgages are created equal check with your mortgage consultant as to how your prepayment penalties are calculated. The difference between one lender definition of penalty to another lender is enormous. Only people with very predictable lives should pick closed mortgages with long terms. And really, whose life is that predictable these days? Avoid long term-closed mortgages.
Breaking your mortgage.
Is there ever a good time to break my closed mortgage and pay the prepayment penalties?
Yes! A good rule of thumb is whenever making a change will result in a 2% - 3% interest rate saving. This is so popular that it is even has a name - the 'break and run' strategy in the lending industry. The improved rate change will absorb any prepayment penalty over the next 5 years in any switch when the spread between the old rate and the new mortgage rate is great enough. Check with a mortgage consultant as often he or she can find additional incentives or deals that reimburse some or all of your prepayment penalties. If you switch and keep your mortgage loan amount the same there are usually no legal fees involved - just a simple 'no fee' switch with the new lender.
Penalties for switching you mortgage.
Are there always penalties when I switch my mortgage to another lender?
No. If you switch from one lender to another at your renewal date there will not be any penalties whatsoever. If you switch before your maturity date or renewal time there may be a penalty. If you have an open mortgage there probably will not be any charge. If you have a closed mortgage you will most likely have a cost. It is important to consult with a mortgage consultant so that you can determine whether or not a 'break and run' strategy will work for you. Often your penalties can be minimized when a mortgage consultant finds a new lender anxious for your business. A new lender will often assist with incentives to lure you over to them. Sometimes the incentive can be as high as a 3% cash back offer that can be used towards any prepayment penalties.
Interest Rate Questions'
Mortgage Term Questions
Long-term or Short-term?
What is better - short-term or longer-term mortgage?
The usual thinking is that you should take a longer-term to lock in low interest rates; when interest rates are higher, you should look to a shorter term - 6 mos. or 1 year. Whenever the interest rate spread between short term and a long-term mortgage rates are significant it is always better to take the shortest term possible. Currently, rates are historically very low, so most people are locking in for terms of 5 or even 10 years.
What is a mortgage term?
What is meant by mortgage term?
Term is the difference between the start and maturity date of the mortgage. You can choose terms of just 6 months, 1, 2, 3, 4, 5, 7, 10 or even a 25-year term. At the end of the term you can either pay off your mortgage, or renew with the same lender or another lender at terms of your choice.
What is Amortization?
What is meant by amortization?
The amortization period is the number of years it takes to repay your mortgage in full. Often when you first get a mortgage it is amortized over 25 years. This means that if you maintained those terms and payment periods, your mortgage would be paid off in 25 years. However, in most cases the amortization period changes because different borrowing terms, interest rates and payments against the principal amount at each renewal vary the length of time required to pay off the mortgage. For example, going with a shorter amortization period - say 15 years for example - will result in higher payments per period, but save you money in interest by enabling you to retire your mortgage sooner.