Mortgage Terms

Down Payment – A down payment is the minimum amount you are putting down against the purchase price from your own savings or resources. As a first time home buyer, a minimum of 5% of the value of the home is required to be paid from your own resources. This amount can be gifted from your immediate family and must be in your account at least 15 days before closing.  

Conventional Mortgage – A Conventional Mortgage is a loan for no more than 80% of the purchase price (or appraised value) of the property i.e., Loan-to-value(LTV) is less than or equal to 80%.

                              [Purchase Price (or appraised value) – Down Payment] x 100

Loan-to-Value =   ———————————————————————————-

                                                  Purchase Price (or appraised value)     

Example : If the purchase price or appraised value of house is $400,000 and you are putting $80,000 or higher, then you are having a conventional mortgage.

High Ratio Mortgage –  A High Ratio Mortgage is a loan for more than 80% of the purchase price (or appraised value) of the property i.e., the Loan-to-value(LTV) is more than 80% and less than or equal to 95%.

Example : If the purchase price or appraised value of house is $400,000 and you are putting $40,000 (10% or purchase price), then you are having a High Ratio Mortgage and you will have to pay a mortgage insurance as per CMHC, Genworth or Canada Guarantee insurance rates whichever the case may be.

Mortgage Term – The mortgage term is the initial time period you commit to the mortgage rate, lender, and associated mortgage terms and conditions. The term you choose will have a direct effect on your mortgage rate. The terms can be 6 months, 1,2,3,4,5,7,10 years. The short terms are historically proven to be lower than long-term mortgage rates. When the term is up, you must renew your mortgage on the remaining principle at the end of term, at a new rate available at the end of the term.

Amortization – The mortgage amortization period, is the length of time it will take to pay off the entire mortgage. All CMHC insured mortgages have amortization periods of 25 years maximum. The longer is the amortization period of the mortgage the more interest you pay over the life of the mortgage.

Mortgage Rates – This is the interest rate you have agreed for the term of the mortgage from the mortgage lender.

Fixed Mortgage Rate – The interest rate is fixed for the mortgage term. The rate contracted with the lender will not fluctuate with the Bank of Canada’s rate (prime rate) fluctuations during the term.

Variable Mortgage Rate – The mortgage interest rate fluctuates up and down as the prime rate goes up and down. The variable rate is lower than the fixed rate but you are taking the risk where the rates would be in down the road.

Convertible Mortgage – A convertible mortgage is a mortgage which gives you the same benefits as closed mortgage, but can be converted to a longer term at any time without any penalties.

Mortgage Payment Option – You can choose to pay your monthly mortgage payment frequencies as monthly, semi-monthly, bi-weekly or weekly. The more frequent you elect to pay, the more you will save on interest.

Pre-Payment Privileges – The lenders allows you to pay extra into your mortgage without any penalties in two different ways : 1.By increasing your monthly payments; 2.By making additional lump sum payments. This privilege is different for different lenders and varies from 10% to as high as 20% of initial borrowed amount. For example, a lender with 20% Prepayment Privileges will allow you to increase your initial monthly payment by 20% every year and will allow you to pay an extra 20% of your initial mortgage amount every year into your mortgage. These payments can save a significant amount of interest you pay and reduce the amortization.

Mortgage Penalty – This is very important to consideration before you finalize your lender. You will end up paying a huge amount of penalty in case you get into a situation where you need to break the mortgage.

Why break your Mortgage? – You probably are not planning to break the mortgage at the time you sign for a mortgage. But as per the statistics most of the people will refinance or change their mortgage every 3 years. Some of the common reasons to break the mortgage include financial hardship, divorce, relocating and taking advantage of lower rates.

How does mortgage penalty work? – Mortgage penalties are different depending on whether you have a variable or fixed mortgage.

With variable rate mortgage your mortgage penalty is often simply 3 month’s interest.

With a fixed rate mortgage, your penalty is usually the greater of 3 month’s interest and the Interest Rate Differential (IRD). Often times you end up paying a lot more. The IRD is a formula that takes into account the money lenders potentially lose when you break your mortgage.

The IRD formula is used to calculate what you are currently borrowing at and what the bank can re-lend it out at. The bigger the difference in the rates the higher the penalty would be. The bigger banks use the posted rate and not your actual rate to calculate the IRD which results in much higher penalties. For example, current posted rates for a 5 years term is 4.64% and actual rates are around 2.64%, so you are getting a discount of 2%. When they calculate the penalty, they use the higher posted rate (4.64%) for the interest difference for the remainder of the term and not your actual rate (2.64%). We look to place your mortgage with banks that use your actual rate.

You can avoid paying the penalty by porting (transferring) your mortgage to your new property or by doing a “Blend to Term” or a “Blend and Extend”. A blend keeps your existing rate on your mortgage and blends with the current rates to give you a new rate for the remaining term of your existing mortgage or into a new mortgage term. All a blend does is ensures the bank gets the rest of interest for the remaining term.

Mortgage Closing Costs – Bank’s would like to see at least 1.5% of the value of the property available for closing costs. Following are some the closing costs to take into consideration

1.There are legal costs incurred to register the mortgage and these typically range from $800 to $1,200 and paid to the lawyer. In addition to the legal fees, there are additional disbursements and Land Title Insurance. So, budget for around $1,800 for the total of these fees.

2.A Property Appraisal Fee paid to an independent appraiser who will value your property for the lender. This fee ranges from $250 to $300 for residential homes.

3.A property inspection fee paid to independent inspector who does a non- invasive, visual inspection of a building

4.Land Transfer fee is paid at the time of closing the mortgage and you solicitor will let you know the exact amount (close to 1% of property Price)

5.Some Mortgage Brokers will charge a Broker Fee, over and above the fee they are paid from the mortgage lender. The fee can only be paid upfront if the mortgage is over $300,000, otherwise a Letter of Direction is signed for the lawyer to pay the mortgage broker on closing.

6.A mortgage where the LTV is over 80% (65% for self-employed people), the mortgage needs to be insured to protect the mortgage lender in the event you default on your payments. The cost of this insurance depends on the LTV and is added to your mortgage.

Serving the Greater Toronto Area in Canada

The GTA, including Toronto, Etobicoke, Mississauga, Streetsville, Oakville, Burlington, Milton, Hamilton, Ancaster, Georgetown, Brampton, Markham, Vaughn, Cambridge, Waterloo, Kitchener, Stoney Creek, Grimsby, Welland, St Catharines and Niagara Falls.

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Head Office: 5770 Hurontario St., Mississauga, ON, L5R 3G5