All you wanted to know about mortgages but were afraid to ask, part I


Not that it’s keeping you up at night, but I thought you should know

To some the idea of financing your first home may be daunting. Really it shouldn’t be. It’s just that the banks and other brokers or lenders may use finance terms that you don’t know what the heck they mean.

Downpayment: This is the cash that you have saved up to buy your home. This can come from your savings, your RRSP’s or from your family. Some situations as I have discussed in a previous article allow you to borrow it from your own existing credit, however this does not apply to all situations and all lenders.

LTV: Also know as loan to value. This one gets a lot of people confused if you are new to the game. It is the amount of your mortgage loan in relations to the value of the property. For example the house you want to buy is worth 100K and you have 5K of your own money to use as downpayment, and you will need a 95K mortgage. So the bank looks at it as 5% down on a 95% LTV.

Default Insurance: This is insurance provided to the lenders ( sorry not you) to protect them in case of default. It is provided by Canada Mortgage & Housing (CMHC), Genworth and Canada Guaranty. This allows us to purchase properties with as little as 5% of the purchase price. It can be avoided in most cases if you put down more than 20% of the purchase price. However ultimately it is the lender who decides if they will charge it when you put more then 20% down.

Term: This is the length of time that you lock in your current interest rate, or discount to prime rate if you chose to go with the variable rate. Terms are available from 6 months to 10 years. If you feel that rates may go up in the future then go longer term, and shorter if you feel they may go down. Most consumers have tended to go with the 5 year term when choosing their mortgage.

Amortization: Just a fancy way of saying how long it will take to pay off your mortgage. Most residential mortgages in Canada are provided with 25 year amortizations.  30 year amortizations are still available for those with down payments greater that 20% and who do not require default insurance. One simple method for paying off your mortgage faster is to pay it bi-weekly accelerated. This is because you end up paying 26 times a year versus 24 times if you chose semi monthly, and it amounts to an extra mortgage payment a year. You end up paying off your mortgage in just over 21 years instead of 25.

Tune in soon and I will tell you about the 5C’s of credit and how they impact you.

As always let me know if you have any questions,