INDUSTRY INSIGHTS

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MORTGAGE 101: Your guide to basic mortgage concepts

Buying a home is often referred to as the biggest transaction of your life, and with good reason. Dealing with the financial burden of purchasing a property and understanding your options can be a daunting task. Unless you have the funds available to pay for the home in full, you can expect to need a mortgage. This guide will help you understand the basics of a mortgage so you can feel confident going through the homebuying process.

What is a mortgage?

A mortgage is a loan that is used to buy a property.

Why do I need one?

Mortgages are necessary whenever you do not have the funds available to purchase a house at its full value. To cover the outstanding costs, you will need to take out a mortgage from a lender.

I have some money saved up, what can I do with that?

Great! You can use that money toward a down payment.

What is a down payment?

A down payment is a sum of money that is paid initially when taking out a loan (in this case, your mortgage). In most cases, a down payment is required in order to receive the loan.

How much do I have to pay as the down payment?

The down payment will be a percentage of the total purchase price of the property; the lending institution will loan you the remainder. The percentage itself will depend on several factors such as the purchase price of the property and your qualifications (income, financial history, etc.)

Why do I need to put a down payment?

Great question. The purpose of the down payment is twofold: on the one hand, the higher the percentage of the down payment you pay upfront, the lower the loan amount, meaning the less interest you pay overtime. On the other hand, it mitigates lending risk for the lending institution.

Can anyone get a mortgage?

Not necessarily. To get a mortgage loan, you must be approved for one. Your eligibility may depend on your income, employment, financial history, debts, financial obligations, assets, etc. The financial institution will request a number of documents from you, based on which they will determine whether or not you are eligible to receive a loan. Different institutions have different requirements, so you may need to shop around.

Who gives the loan to me?

The financial institution that provides the loan is called the lender. In a mortgage transaction, they become the mortgagee.

So, like a bank?

Sometimes, yes. A mortgagee can be a bank, but it can also be:

  • Mortgage companies
  • Insurance companies
  • Trust companies
  • Loan companies
  • Credit unions or caisses populaires

What about mortgage brokers?

Mortgage brokers don't lend you money. They facilitate the loan process by finding you a lender

What does that make me?

Once you get a mortgage, you become the mortgagor.

So, the lender just buys a property for me?

Not exactly. Essentially, the lender is lending you the property until you have paid it off; meaning, until you have paid the lender back the loan, plus the interest that has accumulated since you signed for it. Until then, the lender is allowed to take possession of the property if you fail to pay your loan on time—in other words, if you default on your loan.

Interest? You mean, I have to pay back more than what I borrowed?

Yes, you pay back what you borrowed, called the principal, plus a monthly interest on that principal. You may also need to pay insurance on your mortgage, depending on your down payment amount.

How much time do I have to pay it off?

That all depends on the duration you agreed to with the lender upon signing your loan. We call this duration the amortization period. The amortization period refers to the amount of time it will take to pay back your loan in full.

Is that the same as a mortgage term?

No. A mortgage term is the duration during which your agreement and your interest rate will be in effect with the lender. If your mortgage term is 5 years, you can renegotiate the terms and the interest rate of your loan after that period. You can even look for a different lending institution to take over the loan.

How long is the amortization usually?

That can vary, it depends on your agreement with the lending institution. Generally, it may be 15, 20, or 25 years. If the amortization is shorter, you make larger payments over a shorter time. If the amortization is longer, you make smaller payments over a longer time.

Wait, isn't it better for me to pay less every time?

Not necessarily. Remember that you pay interest on the loan as long as it has not been paid in full. So, you may be making smaller payments, but you will pay interest for longer.

How often do I have to make payments and is it always the same amount?

This is different for every loan. It all depends on the type of mortgage and the type of payment you have chosen. You can choose between an Open Mortgage and a Closed Mortgage, as well as Variable Payments and Fixed Payments.

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